Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's analyst conference call on its fourth quarter 2017 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. Lard Friese, Chief Executive Officer of NN Group, let me first give the following statement on behalf of the company. Today's comments may include forward-looking statements such as statements regarding future developments in NN Group's business, expectations for its future financial performance, and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement.
Any forward-looking statements speak only as of the date they are made, 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. Welcome to our conference call to discuss NN Group's results for the fourth quarter of 2017. I will kick off today's presentation by talking about the highlights of the fourth quarter results. I will also take the opportunity to look back at the acquisition and the integration of Delta 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 of free cash flow. I will conclude the presentation with a wrap-up, after which we will open the call for Q&A. Jan-Hendrik Erasmus, our Chief Risk Officer, is also with us today to answer your questions. Let's turn to slide number three with the highlights.
NN Group's operating result of the ongoing business for the fourth quarter of 2017 was EUR 345 million. This is an increase of 22% compared with the same quarter of 2016. Was driven by the contribution of Delta Lloyd. The net result for the fourth quarter was EUR 700 million, 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% 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 the later slide. Our balance sheet and capital position remains strong. Free cash flow to the holding company was EUR 336 million in the fourth quarter, driven by EUR 370 million of dividends from our subsidiaries.
This was offset by the repayment of EUR 575 million of senior notes that matured in November and the repurchase of own shares under the share buyback program. On balance, the cash capital at the holding stands at EUR 1.4 billion at the end of the fourth quarter. The Solvency II ratio of NN Group at the end of 2017 was 199%, which is after a five percentage points deduction for the proposed 2017 final dividend. We are today announcing a proposed final dividend for 2017 of EUR 1.04 per share, bringing the 2017 full year dividend to EUR 1.66 per share. This represents a 7% increase on the 2016 full year dividend per share. I will now turn to slide number four.
We completed the acquisition of Delta Lloyd in the first half of 2017, 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 Fonds NutsOhra, 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 EUR 350 million 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 EUR 133 million in 2017. We have 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 five. 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 and distribution initiatives in the past year. We currently have six Sparklabs 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 RightIndem, which offers digital customer-driven claims management solutions. In April 2017, Sumitomo Life started offering NN Life Japan's COLI products through its sales network of around 30,000 agents. This has supported a 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. NN in Greece has renewed its bank insurance agreement with Piraeus Bank for the distribution of its products. 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 six shows our strong commercial performance in 2017.
Total new sales of our insurance businesses increased 34% in 2017 versus 2016 when measured as 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. As you know, our focus is on profitable growth. The value of our new business in 2017 was EUR 345 million, 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, an improved product mix, and an increase in interest rates. Our asset manager, NN Investment Partners, has now reported six consecutive quarters of net inflows of third-party assets.
For full year 2017, the total inflow of third-party assets was EUR 5.1 billion. 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 EUR 17.6 billion at the end of 2017, including the addition of the portfolio of Delta Lloyd Bank. Let's move to the next slide. On slide number seven, 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 EUR 205 million. 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 the 2016 administrative expense base of the units in scope of the integration by EUR 350 million. In 2017, we managed to lower expenses by EUR 133 million. 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.
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 Delta Lloyd Life, as well as the deduction for the provision related to ING Australia Holdings. Delfin Rueda, our Chief Financial Officer, will go into the details of our free cash flow later in the presentation. Let's turn now to slide eight. We have today announced that we are proposing a 2017 final dividend of EUR 1.04 per share. This brings the total 2017 dividend to EUR 1.66, an increase of 7% on the 2016 dividend per share.
The 2017 dividend represents a payout ratio of around 45% of the 2017 net operating result of the ongoing business, in line with the envisaged 40%-50% payout ratio in our dividend policy. The proposed dividend will be voted on at the annual general meeting of shareholders on the 31st of 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 EUR 2.7 billion 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. With that said, I would like now to hand over to our Chief Financial Officer, Delfin Rueda. Delfin.
Thank you, Lard, and good morning, everyone. Let me start with the fourth quarter results. NN Group reported an operating result of the ongoing business of EUR 345 million in the fourth quarter of 2017, up 22% on the same quarter in 2016. This was driven by the contribution of the Delta Lloyd businesses of EUR 104 million, which includes non-recurrent benefits of EUR 36 million, as well as favorable experience variances. This was partly offset by a lower technical margin at NN Life due to negative non-recurrent impacts, as well as unfavorable claims experience in the group income portfolio at NN Non-life. The net result for the fourth quarter of 2017 was EUR 700 million. 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 fourth quarter performance of the individual segments. Let me start with the fourth quarter operating result of Netherlands Life, which increased to EUR 170 million, 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 EUR 31 million in the investment margin and non-recurrent negative items of EUR 33 million and negative mortality and morbidity experience in the technical margin. The operating result of Netherlands Non-life increased to EUR 25 million, 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 100.1% in the fourth quarter of 2016. The operating result of Insurance Europe increased to EUR 68 million, 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 EUR, it increased 18% on the fourth quarter 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 EUR 10 million of non-recurrent performance fees.
The improved results of the segment other in the fourth quarter reflects higher operating results of the banking and reinsurance businesses, while the holding result was lower. 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 EUR 350 million 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 EUR 133 million. This reduction represents around 38% of the total targeted cost savings. Please note that expense reduction will not be linear, and that some units may at times see expense increases to support growth.
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 EUR 1.4 billion at the end of 2017. On slide 13, we show the movement in the holding company cash capital during the fourth quarter, as well as for the full year 2017. The free cash flow during the fourth quarter of 2017 was EUR 336 million, including dividends of EUR 370 million received mainly from the Dutch units. This was offset by the repayment of senior notes for an amount of EUR 575 million in November and the shares repurchased in the quarter for an amount of EUR 117 million. The share buyback program was completed at the end of December.
The total free cash flow for 2017 was EUR 881 million, driven by dividends for a total amount of EUR 1.8 billion received from all business segments. This was partly offset by the EUR 500 million 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 14 and 15, I will take you through the developments in our Solvency II ratio. NN Group's solvency ratio was 199% at the end of the fourth quarter of 2017, down from 204% at the end of the third quarter. This ratio reflects a five percentage points reduction for the proposed 2017 final dividend of EUR 348 million that we announced today.
The operating capital generation for the fourth quarter added five percentage points to the ratio and includes a contribution from Delta Lloyd of approximately €40 million to own funds. Please be aware that going forward, we will no longer report the 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, reflect mainly the tightening 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 five percentage points in the first quarter of 2018. Let's turn to slide 15 for the full year. The Solvency II ratio was 241% 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 cash paid to acquire the company. The total operating capital generation in 2017 was EUR 1.4 billion, of which EUR 1.1 billion was the growth of own funds, and around EUR 300 million, the decrease of solvency capital requirement. The operating capital generation includes the contribution from Delta Lloyd for three quarters for a total amount of approximately EUR 100 million to own funds, as well as a release of the SCR. Market variances can be volatile quarter on quarter, but were actually quite small on a full year basis. Finally, the cash flows to shareholders represent the 2017 interim and final dividends. With that, I pass you back to Lard for the wrap-up.
Yes. Thank you, Delfin. We have today presented NN Group's fourth 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 Delta Lloyd businesses. At our Non-life business, an improvement in the P&C results this year was offset by a deterioration in disability and accident. Given the nature of the business, adverse events can happen and can have an impact on the Non-life results, such as in the first quarter 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% and a cash capital position of €1.4 billion.
This robust position allows us to 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. That means 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. 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 session. To register for the Q&A, please press star one on your telephone. As a reminder, in the interest of time, we kindly ask you to limit the number of questions to two. Your questions will be answered in the order that they are received. Please press star one for your question or remark. Go ahead, please. The first question is from Mr. Johnny Vo, Goldman Sachs. Go ahead, please, sir.
Just two questions, please. Just in terms of the operating capital generation of Delta Lloyd, it was EUR 40 million this quarter, which was lower than last quarter. 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 capital generation should be at per quarter? 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 reserve? Thanks.
Yeah. Thanks, Johnny. Good morning. The first question will be answered by Delfin Rueda, and then I suggest the second question on longevity to be discussed by Jan-Hendrik Erasmus. 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 is not a surprise due to the, let's say, volatility that we see from one quarter to another. In the previous quarters, it was somehow higher, and I think that going forward, we would expect a slightly higher operating capital generation than this EUR 40 that comes in the quarter. Certainly, what we have seen in Q4 does not reduce our expectation of operating capital generation within Delta Lloyd. Please keep in mind that going forward, this is the last quarter that we will report Delta Lloyd contribution on a separate basis. As we following the legal mergers and integration of the business, that won't be possible anymore.
Okay.
Okay, Jan-Hendrik.
Thank you, Johnny, for the question. We've also had a new table from Statistics Netherlands, the CBS, that came back to the end of 2017, and it did show a slightly slower increase of life expectancy than in the previous table. We have reflected that already in our assumptions. 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 de Wit, Kempen & Co. Go ahead, please.
Yes. Hi, good morning. Two questions. First is on the technical margin in the Dutch Life business, EUR 5 million. If I exclude the EUR 33 million one-offs you flagged, I get to a number significantly below where you were in the previous quarter. I understand there is some negative mortality and morbidity results. Just wondering if you could say anything on what we could expect in terms of normalized technical margins for Dutch Life. I think you mentioned EUR 35 million for NN in the past. Maybe you could update us on that. The second question is on the own funds generation. If I take the EUR 1.1 billion for 2017, is that a number that includes any material, positive or negative variances? Could you also share if there is an important drag included in that number linked to the growth of the Japanese business?
I think it's the GCAP numbers you take for the own funds. That could also be helpful if you could comment on that. Thank you.
Thanks, Matthias. Delfin, can you take those questions, please?
Thank you, Matthias. The technical margin in NN Life in the quarter has shown a negative performance. We have always flagged that there is, from one quarter to another, based on the experience variances, we have seen that. In the previous quarter, we saw some positive evolution on the technical margin. We have seen that overall. When you look at the technical margin for the full year of EUR 180 million, somehow provides a better reflection of excluding this volatility. Maybe before I bring other explanations there to your last question, which I think is probably the most relevant. We do expect around EUR 40 million-EUR 50 million per quarter, although with this in technical margin for Netherlands Life, including Delta Lloyd.
With a tendency trending down as a consequence of the reduction of the portfolio due to the run-off and also some negative trend results for longevity going forward. If we go for the own fund generation for the full 2017. We flagged, if I recall properly, in the first quarter of this year. We flag a positive coming from the move from the separate account to the general account, and I think it was around EUR 50 million or so. That would be one-off. We have always emphasized that the own fund generation is going to fluctuate somehow. 2017, with the exception of that one-off I wouldn't mention anything extraordinary. Just to remind you that 2017 only reflects Delta Lloyd for three quarters.
In terms of Japan, is there important negative contribution in own funds because of the growth of Japanese business?
Of course, it does. The drag for the new business, but also includes the positive of the growing in-force. As a consequence, of course, it depends on the rate of the growth. It would be larger than the increase. In general, over time, we will see the growth of the in-force profit to go. As you know, Japan has been growing very nicely, both commercially and in terms of profitability, IFRS profitability over the year 2016, sorry, the year 2017, and we see that momentum continuing.
Okay, very clear. Thank you.
The next question is from Mr. Robin van den Broek, Mediobanca. Go ahead, please.
Yes, good morning, gentlemen. I think somewhere around Christmas, EIOPA issued a paper on the dynamic volatility adjustment, and if you look at your SFCR, you could conclude that for NN, this could be a potential risk. Could you maybe 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. Secondly, it's a bit cheeky, I guess, but your free cash flow for 2017 is EUR 0.9 billion, well below the net operating result of EUR 1.2 billion. Given your guidance, should we expect a catch-up in future few years? Thank you.
Well, thanks, Robin. The first question, Jan- Hendrik, the second one, maybe Delfin. Yeah, first, Jan- Hendrik.
Thank you, Robin, for the question. Yes, we have, of course, taken note of the EIOPA opinion. 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 value as you move down the credit curve. That is very similar to the DNB's view, which they already expressed in 2015. Given how EIOPA's view is now very consistent with the DNB's earlier view, I think there's no real step change here, and we'll pick this up as part of our regular dialogue.
Okay. That's all right, sir.
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 EUR 500 million into Delta Lloyd Life. If you exclude that, then the free cash flow in 2017 was EUR 1.4 billion. 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, but that over time, we expect to be approximately at the same level.
Okay, thank you.
The next question is from Mr. Cor Kluis, ABN AMRO. Go ahead, please.
Yeah, good morning, Cor Kluis. Two questions. First of all, on the storm in the Netherlands, the EUR 75 million 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. Are you also thinking about changing your P&C or fire reinsurance policy somewhat going forward? That's my first question. Second question is about the Solvency II ratio, given what happened year to date, or at least the last two 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, also especially the market effect year to date. Those are my two questions.
Yes, Cor. Thank you very much for your questions. Both will be taken by Jan-Hendrik. On the storm, by the way, it was quite a big storm that hit the Netherlands. 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. Maybe Jan-Hendrik, on the reinsurance side, how is that going to be treated?
Thank you, Cor, for the question. Yeah, of the EUR 75, you'll see EUR 50 million emerge in the unit or segment non-life. The remaining EUR 25 will be in our internal captive reinsurer. In non-life, therefore, we kept roughly EUR 50 million. We have a combination of per event and aggregate cover. We actually did slightly increase our reinsurance coverage this year. 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, yeah, 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 is a five percentage point change to our ratio, it's been flat.
There's been many offsetting elements in there. The volatility net outcome is broadly flat.
Okay. Very good. Thanks.
The next question is from Mr. Ashik Musaddi, JPMorgan. Go ahead, please.
Hi, good morning. Just a couple of questions. First of all, given that there are a lot of one-offs in the NN Netherlands Life business, can we get some sense as to what is the recurring number? If I look at slide number 11, last year was EUR 163, this year is EUR 170. This year you include Delta Lloyd as well. How should we think about a normalized run rate? Is EUR 896 a good guide or should it be higher? Should it be lower? That's one question. Second thing is, can you give us some color about the cash flows? You are expecting to generate around EUR 1.4 billion a year. Your dividend cost is around EUR 600 million a year. What are you going to do with the remaining EUR 800 million going forward on an annual basis?
Any color on that would be really helpful. Thank you.
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 two. As you know, first of all, we aim for a sustainable dividend, regular ordinary dividend, that we wish to do. Secondly, the second piece of the commitment is that 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. Delfin, maybe the first question.
Yes. Ashik, thanks for your question. You're using the term recurring figure, 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 three quarters. I think that the actual result of Netherlands Life for the full year is the base that we use for making that statement.
Yeah, that's clear. Just, sorry, going back to the first, to that question on capital. How should we think about 2018 and 2019? Is there any near-term cash outflow you're expecting apart from dividend? In the sense, 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 EUR 800 million a year, you're already at the higher end of your cash flow number that you aim to reach. What are you going to do in this year and next year? Any planned stuff or maybe something will come up next year. Any thoughts?
As I said earlier, we were comfortable with the overall balance sheet. As you know, we've repaid EUR 575 million of the notes that matured in November. There is, let's say, a natural point in 2020, where a number of EUR 300 million 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.
Okay. That's very clear. Thank you.
The next question is from Mr. Benoit Petrarque, Kepler Cheuvreux. Go ahead, please.
Yes. Good morning, everyone. Two questions on my side. The first one will be on the dividends from the Netherlands Life business in 2018. Obviously, you are in the middle of the merger, also the move to the partial internal 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 this target to be for 2019, 2020? So maybe a level there will be useful. 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.
It would be useful to summarize a bit where you are and where you have the big relationship with them. I mean, mainly outside the Benelux, obviously. Thanks.
Yeah. Let me comment on the second question, and then the first question on dividends for Dutch Life will be taken by Delfin. We have a very good constructive relationship with ING in many markets, huh? We operate already for many years in many markets with ING, in the form of distribution. It is something that we like and we collaborate very well with them, and we'll 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 bank insurance platform over the last years. 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 bank insurance agreement in Greece.
We have a new bank insurance agreement in place in Poland, for instance, and in other markets across Europe. Also in Japan, we've increased the level of partnerships that we have with banks, with other distributors, but also with Sumitomo. We are really positioning ourselves for continued growth momentum that we have been building over the last years, where we did two things. I think, first of all, we've moved the product set to more protection and fee-based products, which increase the margin, the profitability of the products, which is the second thing that we've done. The third thing is to build out the distribution and maintain the costs under control. 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.
Also proof testament to this is the value of new business that has grown more than 60% throughout the year. 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 EUR 300 million dividend that NN Life paid in the second 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 EUR 175 million. That basically shows the increased capital generation within the segment, Netherlands Life. 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 legal entities within the segment, Netherlands Life, are very well capitalized at 217% for NN Life and 150% for Delta Lloyd Life. Maybe just to remind you that there is the intention to merge both entities at the beginning of 2019.
That basically, I think, gives you an indication that we will aim for some sustainability of the dividends coming out of the segment, Netherlands Life.
I should strip out the EUR 300 million from the EUR 1 billion plus you've paid this year, and that could be the level for 2018?
Yes. I think that the EUR 350 million was an extraordinary dividend, if you like, for the second quarter, as I explained. As you know, the statement that we gave about the remittances, the free cash flow to be above the net operating result is always a mid-term objective. It doesn't have to necessarily hold for any particular period of time.
Great. Thank you very much.
The next question is from Mr. Farooq Hanif, Credit Suisse. Go ahead, please.
Hi there. Thank you very much. I noticed that you had a dip in unrestricted Tier 1 capital in your Solvency II ratio. You haven't really talked about this in the past, but to what extent is that going to be a barrier to you distributing capital? What kind of target levels, or how do you think about that unrestricted Tier 1 coverage of your capital requirements? Does it concern you, for example? That's question one. Question two 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 when will that come through, and also in capital generation? Then lastly, what are your plans and expectations for VNB in the Netherlands?
There are good reasons why it's low, which you've explained in the past. When do you think that's going to start turning more positively, given the ability to change product mix and cost savings? Thank you.
Yes. Let me take that last question from you, Farooq. Thank you very much for your questions. I'm going to ask Delfin to comment on the other questions that you have. On growth in the Netherlands, I think value new business in the Netherlands has been, I think, a representation of the relatively low base over the last year. 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 transition, very gradual transition from defined benefit to defined contributions. We are very well positioned for that.
Certainly, after the acquisition of Delta Lloyd, since 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 benefit to defined contribution. Number 2, a 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. 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.
Also that, I think, given where we are with the platform, is a great opportunity for us longer term. 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 valuing the business is the appropriate metrics for it. 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. Because the in-stock, the accrued benefits in these plans are on the balance sheet for a very long time. With that, Delfin, can you get into the unrestricted Tier 1 discussion?
Certainly. Thank you, Farooq. We don't have any specific target for restricted Tier 1 or for Tier 2. 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. We don't see our level of capital or its composition being any barrier for our growth or our plans. Just to mention that for restricted Tier 1, we still have approximately EUR 400 million of untapped capacity. For Tier 2, that will be around EUR 200 million. As I said, we don't need to raise capital at this point of time.
Just coming back on that, sorry. My question was more on unrestricted Tier 1. That its coverage of SCR is low, and it looks low versus, let's say, from various other companies that you could pull up. Does that not something that concerns you or you have 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 that you are talking in terms of, what is the percentage of unrestricted Tier 1 versus the total. I think that first and most important is what is the total, and from there, one has to optimize that when the opportunities come. The composition of our Tier 1 is the result of the acquisition of Delta Lloyd, and we are comfortable with it, and we don't see at this point of time any need to amend it.
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. Our sensitivities that we published also today also reflect the impact of any tiering already. 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.
On the cost savings, we indicated at the Capital Markets Day that we had already realized around EUR 350 million of capital synergies. 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 SCR 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.
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. At fourth quarter 2017, we have, of course, updated these best estimate assumptions, as well as deducted the restructuring cost for the non-Solvency II entities. This is something that, going forward for the life businesses, we'll have to do every quarter. Additional capital benefits will come to the extent that cost savings are higher than is are currently estimated for.
Okay. That's clear. Thank you very much.
The next question is from Mr. Trevor Moss, Berenberg. Go ahead, please.
Good morning, gentlemen. Actually, I thought I'd canceled. 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 it's bad claims experience. Whether you think it's going to be recurring. 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 You might want to do with your excess cash, which is fair enough, I suppose. A couple of specific questions. Do you see any impediments to the ongoing high level of remittances in 2018 and beyond?
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, 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. 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. 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 they're getting well later than we originally expected. I think we need to follow and monitor obviously closely how that will develop moving forward.
We will take action in pricing or other components, if this is needed. Delfin, the cash position.
Yes. In relationship to any possible impediment for the remittances from the subsidiaries to continue, nothing special to highlight. We see all the business units being able to finance their own growth and basically dividend to the holding. 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 EUR 500 million 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. We have seen that even the bank, that in the past has been always a recipient of a capital injection, is now at a good return on equity and provided a good return.
We do not expect any need to inject capital into the bank going forward.
Okay. Delfin, thank you very much.
The next question is from Mr. Steven Haywood, HSBC. Go ahead, please.
Thank you. Good morning, everyone. You had a EUR 36 million non-recurring benefit in the Delta Lloyd business in the Q4. I see there's a EUR 10 million from the asset management business of Delta Lloyd, could you provide a bit more detail on what the other EUR 26 million came from in this non-recurring benefit? Thanks. Second question is on your expense savings and restructuring charges. I think at the current run rate of EUR 133 million expense savings in 2017, you'll achieve your EUR 350 million target one 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? The restructuring costs, I mean, the high level of restructuring cost in Q4 was EUR 100 million or EUR 104 million or EUR 102 million, something like that.
Is this sort of restructuring cost going to continue every quarter? I know you said they're going to be front-loaded, does it mean that the restructuring costs will finish by the end of 2018? Thank you.
Yes. Thank you very much, Steven, for your questions. I'll say something general about the expense reduction target and our progress to that, then I'll hand over to Delfin to expand on that and on the other question that you have. Far this year, we've achieved EUR 133 million. We're of course, pleased with the progress that we're making as we have a EUR 350 million target of which we want to achieve half by the end of 2018, we're well underway, that's good news. However, please also note that this EUR 133 million also included some low-hanging fruit, stopping project spend, for instance, on projects that were no longer necessary. Cost reductions in general are not easy, we're of course pushing forward. We will try to, of course, do as much as we can.
If we can get more, we will certainly try to do that. Please also know that cost reductions are also not quarter by quarter necessary a linear pattern, as we also need to sometimes invest, et cetera, to get access to these cost saves. I will now hand over to Delfin for the other pieces of the question.
Yes, Steven. 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. Of course, we do expect that over time, the restructuring expenses will be lower. I was forgetting the first question, but I was kindly reminded by my colleagues here.
Thank you.
On the EUR 36 million non-recurrent of Delta Lloyd, indeed, as you mentioned it, EUR 10 million 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 you could read. It is, as I said, near evenly spread between the three units, Delta Lloyd Life, Delta Lloyd Non-Life, and Belgium.
Thank you very much.
Ladies and gentlemen, is there any additional questions? Please press star one. 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. At the Capital Markets Day, I think you referred to the merger of the life 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 Holdco cash target to EUR 0.5 billion-EUR 1 billion, rather than the EUR 0.5 billion-EUR 1.5 billion? Thank you.
Yeah, 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 one in 20 event reduces. 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. We did not provide any indication of changing the target range itself. It's more a question of the level of comfort within that range.
Okay.
The range between EUR 0.5 billion and EUR 1.5 billion is, unless we change for other reasons, following the merger of the legal entities, we do not intend to change it due to that.
That's very clear.
The next question is from Mr. Bart Jooris, Degroof Petercam. Go ahead, please.
Yes. Good morning. Thank you for taking my questions. Both on P&C in non-life, the ratio was 98.3% in the last quarter. Can I assume that there is some non-recurring benefit in there from Delta Lloyd Non-Life? What would be, let's say, a good starting number to look at for the coming years? 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. What we saw in Q4 is the second quarter in succession with improved P&C results. Benefiting from good experience in the fire portfolio. We had a combined ratio of 98% for the quarter. This is encouraging, of course, as we continue to implement a range of measures to structurally improve the non-life profitability. I do want to say, this is not a straight line journey. Our objective for the total non-life company to have 97% or below is not something that we want to hit one quarter, but we want to have that as a structural profitability view. That, of course, 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 12-24 months that we need for the measures to take their full effect. Of course, then you also have ups and downs of the nature of the business. For example, the large storm that we flagged that happened in January, in the first quarter of 2018.
Yeah, excluding the storm, could we see a 98.3% as a level you can improve on further on?
We will continue to improve.
This year already?
Well, again, we have two quarters which are encouraging, but to us it should be in a structural overall improvement, 97% or below. We said that we take a lot of measures to get there, both expense reductions as underwriting improvements and the like. 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.
Sorry. Two more questions. First one will be on the cost assumptions in the Solvency II calculation. How much of the EUR 350 million cost cutting have you been able to substantiate in your cost assumptions? I was wondering how much still you need to take going forward. The last one will be just briefly on the UFR drag for 2018. How much will that be post UFR adjustment on the 1st of January? I was just wondering on that one. Thank you.
Delfin?
As I said We have to take our best estimate assumptions, including expense assumptions, when calculating our Solvency II every quarter. 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. 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. Don't estimate or expect that there's going to be a significant one-off increase on Solvency II due to further capitalization of these cost savings.
let's say the recurring capital generation will therefore not be impacted by future cost cutting because you have already taken that into account.
Of those that-
Up 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 NN Bank, savings in the holding in other, or the short tail non-life business, it does going to be reflected as basically the expenses are obtained. That will be reflected when the actual expenses happen.
Yeah. Correct.
In terms of the lowering on the UFR drag, absolutely. We have explained, and it's very logical, that as we have the hit 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 drag reduces. We prefer not to quantify the exact amount because that fluctuates from one quarter to another, also depending on the evolution of the interest rates after year 2020. 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, guys.
Ladies and gentlemen, if there are any additional questions, please press star one. 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 two 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.