Good morning, everyone, and welcome to NN Group's Capital Markets Day. It's a very exciting day for us, and I'm pleased to see so many of you here today. Although many of you know me already, I'm Karin de Jong. I'm the head of investor relations, and I will also be your moderator for today. For those who attended the dinner last night, I hope you had a nice evening in the Kunstmuseum. I would now like to introduce our management board members. Let me start with Dorthe, who gave a very inspiring talk about how to connect purpose, people, and performance. Thank you very much. Lard Friese, our CEO.
Hello, everybody.
Also Delfin Rueda, our CFO.
Hi.
Jan-Hendrik Erasmus, our Chief Risk Officer. David Knibbe.
Good morning.
CEO of Netherlands altogether, Insurance. Robin Spencer.
Good morning.
of our international businesses. Satish Bapat, behind the pillar.
Good morning
of NN Investment Partners. Leon, he is heading our non-life business. Have I forgot any board members? Michel, where are you? Michel of the Netherlands Life business.
Hello.
Jan Van Autreve from our Belgium business. I would now also like to introduce my investor relations team members. They're sitting in the back as a support. Welcome. Geraldine Bakker-Grier, can you stand up? Actually, also welcome to our investors and those that are attending the webcast today, because we're webcasting this live. Sander Komijn.
Morning.
Ruben van der Hulst. I'm not sure, Gitta Salikram, if she's in the room, our Roadshow Manager. I also want to say something about this great location where we are today. We are in the Van Nelle Factory. This is a historic monument. It's also a UNESCO World Heritage site. The building's history dates back to 1923, and it was used for many years for the production of coffee, tea, and tobacco. Today, here, we are in the coffee factory. Both NN and Delta Lloyd also have long and rich histories going back some 200 years. Now we are embarking on a joint future. This is also something that we try to capture in the theme for today, which is Capitalizing on Our Combined Strengths.
Our objective for today is to give you an update on the strategy, the targets of NN Group, the combined NN Group. We will also talk about our continued sound capital management. Delfin will do that. Jan-Hendrik will talk about how we manage risk for value. In the afternoon, we will also take you through all our businesses and their developments. We have a full program for today, nine presentations altogether. We are keen to get started. All the presentations have been handed out to you. It is quite a lot of information there, about 140 pages altogether, but we hope that you will appreciate it. There is also a detailed program in the front section of your book so that you can see where we are.
As you can see, we have scheduled ample time for Q&A. We will ask you to reserve your questions until then. We have also scheduled several breaks throughout the day so that you have time to also talk to the various presenters. I will endeavor to keep you on schedule today so that we do not eat into our breaks. Finally, just two practical points. If you have got any questions or you need any assistance, please ask Gitta or anyone at the reception desk. I would ask you to please switch off your mobile phones for today. Now I would like to invite you, Lard, onto the stage to kick off the day with your presentation on the strategy.
Yes.
Thank you very much.
Welcome, everybody, and also welcome to everybody on the webcast. Highly appreciate that you are there. I know it is not only investors, analysts, and other stakeholders, but also our colleagues that are there to a certain extent. Welcome, guys. It is good to have you here. Very good morning to all of you here in the Van Nelle Factory. We have a full program today that I hope will allow you to see the continued progress that we are making as a company. Looking back, NN Group has been through quite a transformation process over the past three and a half years. We first prepared the company for its separation from ING and our IPO on the 2nd of July 2014, establishing the NN identity and brand.
Following the IPO, we focused on improving the performance of our business units and demonstrating to our shareholders and other stakeholders the strength of our company. We also prepared for the introduction of the Solvency II regime at the beginning of last year, including obtaining approval from the Dutch regulator for our partial internal model. Throughout, we have focused on generating cash, improving earnings, transforming our business model, and deploying our capital in ways that create value for our shareholders. The most recent example of this was, of course, the Delta Lloyd acquisition. We will spend a lot of time today talking about the benefits of this acquisition and how we are progressing with the integration of the two companies. Let us begin and move to slide number two, the key announcements of today. We issued a press release this morning announcing our financial targets for NN Group.
The key announcement was our aim to further reduce costs by a total of EUR 350 million by the end of 2020. This will come from a combination of the synergy benefits of integrating Delta Lloyd into NN Group and the existing standalone programs that were running at both companies prior to the acquisition. In addition, we expect to achieve an annual earnings growth of 5%-7% on average from 2017 onwards in the medium term. We have reconfirmed our guidance that over time we expect to generate free cash available to shareholders in a range around the net operating results of the ongoing business. Our dividend policy has not changed, meaning a payout ratio of 40%-50%, and excess capital that cannot be deployed in value-creating opportunities will be returned to shareholders.
We expect to complete the integration of Delta Lloyd by 2020 and the legal mergers by 2019. Let's move to slide number three. My presentation covers four themes. First, I will look briefly back at what we have achieved in the past three and a half years since the IPO and how we have created value for our shareholders. I will then reflect on the acquisition of Delta Lloyd, on how we assessed it, the benefits we believe it will bring, and how we are managing the integration process. After that, I will walk you through our priorities to improve performance at our operating units and transform the business model. I will round off by talking how we look at the allocation and deployment of capital. Let's move to slide number four. A critical component of becoming a standalone company was to establish our own identity and brand.
We have clearly articulated our purpose, which is to help people secure their financial futures. We have distinct values. We are clear. We care. We commit. Those values are not voluntary suggestions. We take them very seriously. They are commitments not only to our customers, but to all our stakeholders. The values are embedded in our key processes, and they guide the actions of all of us throughout the entire organization. Since the IPO in 2014, we have further strengthened our positions in the markets where we operate, and successfully expanded our distribution capabilities, including, for example, the agreement with Sumitomo in Japan earlier this year, and the recent extension of our agreement with Piraeus Bank in Greece. Customer satisfaction has seen a marked improvement across all businesses and regions, measuring using the Net Promoter Scores.
We have significantly lowered our expense base in the Netherlands, which is now more than 25% lower than in 2013. Such measures obviously have a large impact on an organization, but I'm pleased to say that our employee engagement scores have also improved. Our balance sheet has remained robust, in line with our disciplined approach to managing our capital. At the same time, there are clearly some areas that are performing below our expectations, such as the low profitability of non-life and the lagging inflows of the asset manager. We have taken measures in the past and we will intensify our efforts in the coming years. Leon van Riet, the leader of our non-life business, and Satish Bapat, our head of the NN IP business, so the asset manager, will address the plans that they have for this in their presentations this afternoon.
Overall, I believe that we can say that we have delivered on the financial targets that we set for NN Group at the time of the IPO. In terms of earnings growth, expense reductions, and return on equity, we have met and exceeded our targets. Therefore, our guidance that we would generate free cash for shareholders in a range around the net operating result of the ongoing business has also held up. Over the three years, 2014 to 2016, our net operating result has totaled EUR 2.9 billion compared with the free cash flow generated of EUR 3.2 billion. Let's move to slide number seven. We have stayed true to our equity story, and we see no reason to change it. Our balance sheet has remained strong, and we aim at keeping it that way in the future.
Our focus in the Netherlands remains on further enhancing efficiency through expense reductions, optimizing the risk-return of our investment portfolio, and restoring the profitability of the non-life business. Our growth segments are Insurance Europe, Japan Life, and Asset Management. This growth is self-funded, in these units too, we are vigilant on the level of expenses and are therefore able to benefit from operating leverage. Our operating entities have generated a significant amount of cash, with most subsidiaries upstreaming regular dividends. Since the IPO, we have received total remittances from our subsidiaries of almost EUR 4.9 billion. This strong cash generation has enabled us to distribute more than EUR 2.3 billion to shareholders in the form of dividends and share buybacks since the IPO.
In line with our dividend policy, we continually look for opportunities to invest excess capital in value-creating opportunities, and we did just that earlier this year when we acquired Delta Lloyd, which was also almost entirely cash-funded. Let's move to slide number eight. Let us now look at the robust financial position. Our cash capital at the holding company, after redeeming the EUR 575 million senior notes a couple of weeks ago, now stands at just over EUR 1.2 billion, so within the target range that we set of EUR half a billion to EUR a billion and a half. Our financial leverage position is also satisfactory. The NutsOhra transaction and the November senior notes redemption have reduced the notional debt by EUR 1 billion. In short, we have effectively reduced leverage to the simple sum of the debt of both companies prior to the transaction.
The NN Group Solvency II ratio stands at 204%, which is strong. Our legal entities are also well-capitalized. Some of the Delta Lloyd entities were relatively less well-capitalized at the time of the acquisition. As the Delta Lloyd and NN entities merge in the coming period, the solvency ratios of the merged entities will be at good levels. We are very focused as a management team on the predictability and stability of internal cash flows. The cash generation capacity of our businesses supports our regular dividend payments to shareholders and any other value-creating opportunities that may arise. Let us move to slide number nine. Looking forward, we have defined the following priorities. Number one, we will deliver on the Delta Lloyd transaction. That means successfully integrating Delta Lloyd into NN Group and extracting the envisaged synergies.
We aim to bring together the best of our businesses and the best of our cultures to create a stronger and better firm. Number two, we will continue to further improve the performance of our businesses. We're not satisfied with the performance in certain areas. It has our focus, and we will address it. Number three, to use technology and innovation to transform our business model. This is about improving our service to our customers and increasing customer satisfaction. This can take many forms, including digitalization, developing new products to anticipate new customer demands, and finding new ways to distribute our products. It is also about making our organization more agile and our processes more efficient, flawless, less expensive. Our fourth priority is to continue to allocate capital rationally.
Let me now go through these four priorities, starting with the integration of Delta Lloyd on slide number 11. Let me remind you of what I said at the Capital Markets Day in 2015 when we set out the principles that we would follow when assessing an M&A opportunity. I said we would apply strict financial and non-financial criteria when comparing such opportunities with the alternative deployment of that cash by returning it to shareholders, and that we would ask ourselves the following questions: Is there strong value creation potential? Is it highly accretive? Does it provide better returns for shareholders than the cost of capital? Can we maintain a strong balance sheet and solvency position? Is it a business we know and understand well? Will it improve our customer proposition overall?
We performed significant pre-deal preparatory work over a long period of time before launching our bid for Delta Lloyd. As a result, we were confident in our conclusion that this was indeed a transaction that would create value for our shareholders. Let me say that so far, the Delta Lloyd acquisition has, at the very least, met our expectations. We have seen encouraging commercial momentum following the acquisition. In terms of the strategic benefits of the transaction, we have a very large in-force pension client base and the scale to capitalize on the shift to defined contribution pensions. We have doubled our size in non-life, which will lead to improved capabilities and an increased capacity to make portfolio choices.
Delta Lloyd also brings enhanced distribution capabilities through the OHRA direct channel and the ABN AMRO joint venture. Additional scale has been added to our banking and asset management franchises with minimal cost, thereby resulting in a more competitive commercial position. In Belgium, we can transform from a mono distribution manufacturer to a multi-channel, multi-product number four market player. Let's turn to slide 13. The financial benefits of the acquisition are compelling. We have deployed EUR 2.4 billion of capital to acquire Delta Lloyd at an expected return of at least 10% on that capital. Part of the acquisition price was financed by EUR 900 million of senior debt, which we issued in May at attractive rates. As you've seen from our recent quarterly results, the former Delta Lloyd entities are contributing to capital generation.
Together with the future synergies to be realized, we expect this to translate into additional cash flows, free cash flows over time. As announced at the time of the transaction, we anticipate a double-digit increase in dividend per share for the year 2018. Let's move to slide number 14. From the start, we have aimed to drive the pace of integration of our two businesses. This means that we already have achieved a lot. The senior leaders of all our business units and the support functions at head office were announced immediately after settlement of the offer in April this year. These leaders then developed detailed plans for the integration of their units and departments. The integration of several departments at head office is already complete, and others are in progress.
We've started extracting synergies where possible, finding quick wins, for example, stopping projects and contracts that are no longer necessary. Looking ahead, the integration is going to be a multi-year process. Combining the businesses at the asset manager, the bank, and the Belgium business, and the head office will be relatively straightforward, and therefore should be largely complete by the end of 2018. This will enable us to already achieve about half of the total envisaged cost savings by the end of 2018. The integration of the Netherlands Life and Netherlands Non-Life units is more complex and will be completed later in the timeline. All in all, we expect a total EUR 350 million of cost saves to be realized by 2020. Finally, we aim to complete the legal mergers of the various entities by 2019 at the latest.
Let's turn now to the individual businesses, where we are committed to further improving operating performance and transforming the business model through innovation. Let's move to slide 16. Let us begin by looking at the composition of the group following the Delta Lloyd acquisition. The right-hand chart shows the operating results for the combined group for the first nine months of 2017 by business unit. On the left, you can see how much equity we have allocated to each of the units. As you can see, the majority of our earnings comes from the Dutch units, and even more now than before the acquisition, and this will remain to be the case as we turn around the profitability of the Netherlands Non-Life business. We are a diversified group with a significant share of earnings coming from other European countries and from Japan.
It is mainly at these units and at our asset manager that we see further opportunities for growth. Please note that the segment Other, which includes our banking business, is not shown in the pie charts. The banking business has reported a total operating result of EUR 92 million for the first nine months of 2017. Let's move to slide 17. Starting in the Netherlands, we aim to further increase efficiency at the Dutch businesses and extract the synergy benefits of integrating the Delta Lloyd units. This translates into a cost reduction target of approximately 20% at both the Netherlands Life and Netherlands Non-Life, and approximately 10% of the bank by 2020. At the same time, we will continue to optimize the risk-return of our investment portfolio and look for opportunities to invest into higher-yielding assets.
With our strength of market position, we are even better placed to capture growth opportunities in the pension area. Efficiency is key to managing the run-off of the closed blocks, and Michel van Elk, our CEO of the NN Life business, will talk more about that this afternoon. The unit-linked file has been with us for many years, and we have been devoting a lot of time and effort in reaching out to every single customer with such a product to find a solution on an individual basis. We truly think and believe that this is the best and most effective way to resolve the matter over time. In the meantime, we continue to defend ourselves in legal proceedings, and there have been various rulings in the course of this year, cases involving NN, as well as other Dutch insurers.
There is no consistency in case law yet, and therefore, our position on this issue is unchanged. We intend to take decisive action to turn around the non-life business. As you know, we have taken multiple measures in the past few years. We have seen improvements in several areas, but we acknowledge there is more to do to further lower the expense ratio and to improve the underwriting results. As I said earlier, Leon van Riet will walk you through all the steps we're taking to reduce the combined ratio to 97% or below. Let's move to the next slide. Over the past few years, our bank has evolved in a significant and profitable player in the Dutch mortgage and savings market and has supported this growth partly through its own successful wholesale funding transactions.
It also originates high quality, long-term mortgage loans for the investment portfolio of the insurance businesses. The future of growth of the bank will be self-funded. Let's move to slide 18. Our strategy for Insurance Europe and Japan Life has not changed. We continue to focus on profitable growth, putting value before volume. We have further improved our distribution capabilities in these regions through new bank insurance partnerships, but also, for example, by upgrading the efficiency of agents through digitalization of sales and underwriting processes. We aim to continue delivering an excellent customer service through innovative products and digitalized customer engagement. Robin Spencer, our CEO International, will expand on these themes this afternoon. NN Investment Partners is our asset manager, which together with Delta Lloyd Asset Management, manages almost EUR 250 billion for the insurance businesses and for third parties.
The integration of Delta Lloyd will generate cost synergies, for example, by leveraging upon our scalable platform, merging Delta Lloyd funds into the NN fund range, and integrating investment management teams. We aim to reduce the cost base of the asset manager by 5%-10% by 2020. It's a challenging environment for active asset managers, and that is why we are increasing our focus on several key investment capabilities such as multi-asset, fixed income, and liability-driven investments. Satish Bapat will talk more about this later today. As Group CEO, my priority is to ensure that capital is available for these businesses to expand their profitable growth. We believe that it is important to keep innovating in order to continue improving our service to our customers and to be ready for the future. Let me explain how we are doing this.
Innovating the core is done within the business units, close to the customers by improving our existing offering, process, services to create a digital, personal, and relevant customer experience. For example, the next best actions that we offer during our contact with our customers in the Netherlands. These relevant and personal recommendations lead to higher customer satisfaction and improves cross-sell ratios, and David will talk more about that in the afternoon. Cultivating the right innovation mindset and embedding new ways of thinking and working into the organization are key to ensuring that we have the necessary agility. Our six SparkLabs that we have in the Netherlands and in international markets provide an out-of-office environment to foster innovative ideas and to infuse innovative thinking into NN. They also initiate and pilot new concepts.
For example, earlier this year, we launched Brickler in the Netherlands, an app that simplifies the process of buying a house. In total, we have more than 120 initiatives in our innovation pipeline. Innovation is also supported by the connection with relevant partners. For instance, in Hungary, we are currently partnering with Vodafone and a startup to develop a new service to help people with diabetes to better monitor their blood sugar levels. Last year, we started partnering with Startupbootcamp, letting us learn new ways of working, build new relationships, and support young startups in becoming successful fintech companies. Let's move to slide number 20. Technology is crucial to supporting the innovation ambitions that we have and to deliver a superior and intuitive customer experience. We do this by investing in top engineering talent and business-enabling technology. Our technology strategy is built on speed, quality, and craftsmanship.
An excellent customer service requires a scalable insurance platform, as well as investing in the right technologies such as cloud, robotics, machine learning. It also requires agility, including continuous delivery within IT and embracing the DevOps model as a development platform and process. We are executing our IT roadmap not only to drive innovation, but also to increase the efficiency. We have completed the first phase of our cloud migration, and will be fully utilizing native cloud by 2020, leading to speed, scalability, variabilization, and a 15% hardware cost reduction. Robotics and machine learning are already supporting operations in parts of life, non-life, and the asset manager, doubling efficiency and improving quality. Finally, the successful IT integration of Delta Lloyd and the implementation of our technology strategy will help and support the realization of our synergy targets.
Let's move on to our final priority, which is to continue to allocate capital rationally. NN Group has a strong set of businesses under its umbrella. Our leading market positions in life and non-life in the Netherlands have been reinforced following the acquisition of Delta Lloyd. We moved first and we moved in size in the consolidation game with the partner that we wanted. Now we have a very strong position with no need for additional acquisitions. While our priority in the near term is to focus on integrating Delta Lloyd, we are open to bolt-on acquisitions, primarily outside the Netherlands. Our positions in Europe are strong, but we would be interested in acquisitions where they bring additional scale, diversification, and distribution. Obviously, all within the very disciplined framework that we have to assess all those opportunities, if and when they arise.
With addition, we have materially strengthened our position in Belgium that can be built upon in the medium term. Remaining markets where scale is lacking will be regularly assessed as to whether we are still the appropriate owner of the business. Our business in Japan is creating significant value for the group. It is worth noting that it is already our largest unit by gross written premium and by value of new business. Then Investment Partners offers its products and services globally through regional sales offices in several countries across Europe and Asia, with the Netherlands as its main investment management hub. The turnaround of the asset manager involves sharpening its focus on distinct investment capabilities and distribution channels. Let's move to slide 23.
Our diversified portfolio of businesses offers a combination of stable returns from our operate businesses, earnings upside from the units that we are reshaping, and exposure to growth. Our priority at the Dutch Life business is efficiency and improving the return on capital, which should secure stable cash flows over time. We have certain units where we are in the process of reshaping. The Non-Life business, because the performance has not been good enough, and Belgium, because we now have a fundamentally transformed market position with the Delta Lloyd transaction. Jan will expand on that this afternoon as CEO of our Belgium business. Our growth businesses in Central Eastern Europe and Japan, which account for about 20% of our capital, are writing a significant amount of new business and have delivered above 80% growth in value new business since 2014.
Also, our asset manager has attracted good levels of net inflows of third-party assets to date this year. They are also a source of earnings diversification. If we can allocate more capital to these high return growth areas, organically or inorganically, we would be keen to do so. Let's turn to slide 24. We will continue to allocate capital rationally. As a first priority, we ensure that our businesses have the capital they need to realize their strategy. We want them to invest and adapt to the new realities of our industry. We want them to innovate and capture opportunities which may emerge by being agile. At the same time, we want our units to keep improving the market and business positions, whether that be in terms of efficiency, growth, or return on capital.
When we consider new opportunities, we ask ourselves a series of questions, a framework to assess whether or not they make sense for us. We are rigorous in this analysis. Does the plan achieve the hurdle rate that we require of it? What is the sensitivity of the plan? What is the readiness of our business to execute upon it? These considerations drive our decision-making with the overall objective of constantly looking to improve our market position and cash flow capacity. Finally, when we have excess capital, it will be returned to shareholders, as we have done in the past, unless we can find value-creating opportunities. We believe in the concept of being the best owner, the best owner concept, and ask ourselves why we would be able to extract value from an asset.
We look at the risk relative to the return. We once again realistically assess our readiness and capacity as an organization. Unless we are comfortable on these items, cash will be returned to shareholders in the most efficient way. To sum up, we've made good progress on our journey as a standalone company over the past three and a half years. We still have more work to do. Our priorities going forward are to successfully integrate Delta Lloyd into the NN organization, extract the synergies, and build on the commercial benefits of the combination. At the same time, we will continue to improve the operating performance of the businesses while investing in innovation and technology to transform the business model. Finally, we will continue to allocate capital rationally and always with a view to creating shareholder value.
At all times fulfilling our purpose to provide excellent products and services to our customers to help them secure their financial futures. Thank you very much. Now I'll hand over to Karin. Thank you.
Thank you very much, Lard. We have a long Q&A session at the end of the morning. I would ask you to save all your questions until then. I would now like to invite Delfin onto the stage, to talk to us about our continued sound capital management. Over to you, Delfin.
Thank you very much, Karin. Good morning to everyone. My presentation today is going to be centered around three things. First of all, I would like to talk you through the progress we have made since the IPO. Then I will cover the benefits of the Delta Lloyd transaction, including our new expense ambition for the entities that are in the scope of integration. In the last part of my presentation, I will cover our capital framework and dividend policy, including the main drivers of cash generation. I will close off with a few words of the new targets for NN Group and for our segments. Looking back, as already mentioned by Lard in his presentation, we can say that we have delivered on the financial targets that we set for NN Group at the time of the IPO.
To be a bit more specific, we grew the operating result of the ongoing business by 11% per annum over the period 2013-2016. That compared with a target of 5%-7%. In the bar chart on the top right corner, you can see that the net operating ROE of the ongoing business has increased over time, reflecting the improved profitability as well as capital distribution to shareholders. The bar chart at the bottom left corner shows that we did achieve our expense reduction target in the Netherlands of EUR 200 million almost one year and a half earlier than initially envisaged. Have reduced expenses by around 25% since 2013. Lastly, since the IPO, our free cash flow generation has been in a range of the net operating result of the ongoing business, in line with our over time guidance.
Let me turn to the capital generation since the introduction of Solvency II. On this slide, you see the movement of our solvency since the introduction of Solvency II in January 2016. Then the solvency ratio was 239% compared to 204% at the end of September this year. Our operating capital generation during that period was approximately EUR 2 billion, of which EUR 1.7 billion were the growth of own funds, and around EUR 300 million the decrease of solvency capital requirements. The operating capital generation includes the contribution from Delta Lloyd for two quarters, for a total amount of EUR 110 million. Markets were quite volatile during this period of time. However, the overall impact of market variance resulted in a change of only three percentage points in the group solvency ratio.
It's gratifying to see that when looking at longer periods of time, in this case, the last seven quarters, the typical quarter-per-quarter volatility disappears. Since the introduction of Solvency II, we distributed EUR 1.1 billion to shareholders, representing EUR 700 million ordinary dividends and more than EUR 400 million of share buybacks we executed in 2016. Comparing the EUR 2 billion of operating capital generation with the EUR 1.1 billion of cash distributed to shareholders, we can conclude that the total distribution to shareholders was more than well covered by the operating capital generation. Finally, on the far right, we show the impact of the addition of the Delta Lloyd own funds and SCR after the deduction of the cash consideration paid. With that, let me briefly remind you where we saw value in acquiring Delta Lloyd. We see benefits from the Delta Lloyd transaction in three areas.
Firstly, although more limited, we see some commercial benefits, where sharing best practice will lead to better customer proposition and service. My colleagues will touch on this in their presentation later today. Second, we see benefits on the cost side, where greater efficiencies will lead to cost reductions. Thirdly, there have been and will continue to be some funding and capital benefits. Let's take a closer look at the cost reductions we aim to achieve. At the time of announcing the Delta Lloyd acquisition, cost synergies were estimated at EUR 150 million. We have updated our estimate. We aim now to reduce administrative expense based on the units in the scope of the integration by a total of approximately EUR 350 million by 2020. This cost savings target includes the previously announced standalone cost reduction plans of the Dutch units and represents approximately 17% of the 2016 annual expense base.
We expect roughly half of this expense savings to be realized by the end of 2018. Redundancy and restructuring costs will be needed to realize the target cost savings, and we expect these investments to be approximately one and a half times the savings amount. These investments are expected to be relatively front-end loaded. We will try to manage these downs as much as we can. To help you better track the underlying evolution of the total cost base, we will continue to present this cost separately as special items. Similar to our previous expense targets, this new expense reduction ambition will have to absorb upward cost pressure, for example, from inflation and regulatory changes. Let's zoom in and look at the split of expected cost savings among the different segments.
We expect slightly more than half of the cost reductions of EUR 350 million to come from Netherlands Life and Netherlands Non-Life, and the remainder from the banking business, asset management, Belgium, and the holding companies. Initiatives to realize the overall cost reductions include further process simplification, lower real estate cost, conversion to lower cost technology platforms, and removal of duplication and project spend. Let me remind you that while we also expect significant cost synergies in our asset management and banking units, this will be partly offset by expense increases to support growth. Apart from some revenue benefits and significant cost savings, the acquisition of Delta Lloyd has provided some capital benefits, too. As you can see here, we've already realized around EUR 350 million of capital synergies related to the initial SCR diversification, LAC DT, and own funds steering benefits.
Going forward, we expect to achieve some additional limited capital benefits, most notably on the solvency capital requirement side, as we implement the partial internal model for the Dutch Life and Non-Life businesses of Delta Lloyd. As we have highlighted before, the positive impact thereof will be partly offset by the loss of the longevity hedge benefit currently in the standard formula SCR of Delta Lloyd Life. We see some benefits on the own fund side related to the risk margin upon merger, merging the Solvency II legal entities. Our message here is that we will continuously look for synergies. Until these are achieved, we remain prudent on our expectations for this. Let's move now to our capital management framework. Our capital framework remains unchanged and is based on three pillars.
Firstly, the capital in the operating units, which we keep at a level so that the units can compete in the local markets. The surplus capital they generate needs to be upstreamed to the holding company, where it becomes part of the second pillar, cash capital. The cash capital is kept at the holding company to cover stress events and holding company costs. The third pillar deals with financial leverage, which we aim to maintain at a level consistent with a single A financial strength rating. As I'm sure you have heard me saying before, we manage our capital in a holistic way, looking at each of these three parts in conjunction, as they are closely linked. For example, if we keep more capital in the operating units, our cash capital requirement at the holding company will be lower, and vice versa.
Let me cover each of these pillars in some detail, starting with evolution of the solvency capital and remittances of the operating units. This slide shows the solvency ratio of the main regulated business units of NN Group since the introduction of Solvency II. It also shows the cumulative net remittances from these legal entities to the group. There are two points I want you to take away from this slide. First, our business units are generating a substantial amount of capital. Their solvency ratios have remained at strong levels despite upstreaming significant dividends to the Group. NN Life, for example, has seen its ratio improve to 218% at the end of the third quarter this year. While it upstreamed a total of EUR 1.4 billion since the end of 2015 by consistently paying a dividend each quarter.
The ratio improvement is driven by operating capital generation and supported by financial markets appreciation. The other business units also contributed to the overall remittances to the group, while maintaining healthy solvency ratios, too. The contribution of the Delta Lloyd unit to the overall remittances is so far limited to EUR 65 million. However, we expect this to increase as we integrate the businesses and extract the synergy benefits. Second, we can see in the last bullet on the right that after the intended merger of the NN Life and Delta Lloyd Life, the pro forma solvency ratio is at a very comfortable level of around 195%. The same is true for the merger of the Belgium entities and the Non-Life companies in the Netherlands. These are simple pro forma, some calculations based on the latest available solvency data. The actual ratios will be different.
In short, the key message here is that our main operating end units provide a strong capital generation and regular dividends from diversified sources, while maintaining solid solvency ratios. Let me now take you through our philosophy towards managing cash at the holding company. As I mentioned before, we hold cash in the holding company to cover for potential stress events in our units. This relates to our overall risk appetite. We want to avoid having to raise equity capital after a one in 20 event. The exact desired amount will vary, depending on how much risk we have taken and the capital position in the business units. On top of this, we hold cash to fund the holding cost, including funding expenses for a period of one year. Note that our cash capital is invested in short-term deposits and funds.
It is therefore freely deployable and not impacted by market movements. This allows us to inject it into our units at any time if that becomes necessary. At the end of the third quarter, our pro forma cash capital position at the holding was EUR 1.2 billion. Our target range of cash capital is between EUR 0.5 billion and EUR 1.5 billion, and this range is unchanged after the Delta Lloyd acquisition. We anticipate that the cash capital requirements will reduce within this range when we merge legal entities, the reason being that the capital injections needed to recapitalize this business and units after a stress event will reduce. Turning now to the third pillar of our capital management approach, where we show our debt maturity profile. Our financial leverage in absolute terms currently stands at EUR 6.1 billion.
We partly financed the acquisition of Delta Lloyd with additional leverage and have been able to offset this increase through the [Nat OHRA] transaction in April this year and the repayment of the Delta Lloyd senior notes earlier this month. In the last years, we were able to refinance our debt at attractive pricing, and the overall cost of our debt is now 3.8% on average. We are comfortable with our current level of financial leverage and a strong fixed coverage ratio. This provides additional financial flexibility. The next maturity debt is EUR 300 million in 2020, and our strong free cash flow generation provides optionality for further deleveraging at that point in time, if desired. Moving on, there are several remarks I want to make regarding the solvency capital structure of NN Group.
To start with, in our calculation of eligible own funds for the group, we exclude EUR 1.3 billion of non-available own funds. This represents capital that, for one reason or another, cannot be upstreamed to the holding company. We do, however, expect a part of this to convert into eligible own funds at some point in time. An example of this is future profits in some of the European businesses. They are included in the local solvency ratios, but they are not yet available for distribution and therefore excluded from eligible own funds at the group level. Additionally, we have EUR 300 million non-eligible own funds, which represents the deferred tax assets, which are above the Tier 3 cap of 15% of SCR. Over time, this would also convert into eligible own funds. Note that the regulatory capital of our banking business of around EUR 900 million is excluded from own funds.
Our overall level of hybrid debt is at a comfortable level now, and at the third quarter of 2017, we had around EUR 800 million of unused debt tiering capacity. Earlier in my presentation, I showed the change in solvency capital of NN Group since the introduction of Solvency II. Let me now take you through our solvency movement analysis so far this year, so I can provide further insight into each of these components. In the first column, you can see that we generated operating capital for a total amount of EUR 1.1 billion. This is mainly driven by approximately EUR 900 million own funds generation by the Solvency II entities, Japan Life, Asset Management, and the pension funds in Europe. Operating capital generation also included an approximately EUR 200 million release of SCR, mostly from the run-off of the Japan Closed Block VA and individual business in the Netherlands.
Next, we benefited from some favorable market movements. As you know, the movement of market performance can be significant and volatile quarter on quarter. Jan-Hendrik will take you through our sensitivities to market movements in the next presentation. The bucket other reflects model and assumption changes as we continue to align the assumptions to our experience and refine our models. Furthermore, the other column includes the accruals of qualifying debt of approximately EUR 40 million a quarter, as well as special items related to non-Solvency II regulated entities from the third quarter 2017. The net capital flows in the first nine months include the 2017 interim dividend of EUR 209 million. The last column represents the inclusion of Delta Lloyd's own funds and SCR at the time of the acquisition, less the cash paid to its former shareholders. I would like to move from capital generation to capital remittances.
On this slide, we show the main drivers of remittances which sustain the free cash flow generation of the group and ultimately ordinary dividends to our shareholders. As this is an important slide, I will take a bit more time, so bear with me. The drivers of remittances are own fund generation, changes in capital requirements, and capital levels. Let me remind you that these are clearly interrelated. For example, if credit spreads of sovereign bonds tighten, this increases the capital levels but reduces the own fund generation, and vice versa. Let us start with Netherlands Life, which has been a steady contributor to overall free cash flow. Remittances continue to be funded by a combination of own fund generation, largely through excess investment return, and a reduction of required capital due to the run-off of individual life and pension back books.
The strong capital level of NN Life plays a role here, as it can complement the contribution to remittances of the capital generation of the segment Netherlands Life. Overall, remittances from Netherlands Life are expected to be above its net operating result in the coming period. For Netherlands Non-Life, we expect most of the dividends to be driven by own funds generation. Improving the combined ratio provides a clear opportunity to increase remittances, as we expect improvements in remittances and IFRS net operating result to track closely with each other. In Insurance Europe, we also generate own funds by the excess investment return. Here, the value created when writing profitable new business is an important driver of own funds generation as well. Capital requirements will increase as we write new capital-light products, but reduce as the SCR related to more capital-intensive back books gets released.
In addition, in many of our jurisdictions in Europe, local profits need to be taken into account in determining remittances. Altogether, we now expect that the remittances from Europe will be in line with the net operating result from these units, as Robin will explain in his presentation this afternoon. Our Japan Life business is included in operating capital generation on a local GAAP basis, where we incur a large new business strain. In the short term, therefore, selling more new business leads to lower local JGAAP profits, which in turn leads to lower remittances. However, because the payback period of these products is approximately five years, we do expect that this will lead to increased remittances over time as the in-force portfolio grows.
For asset management, remittances are more or less equal to the IFRS net profit, and improving fee income relative to expenses is the most important driver. Japan VA will contribute to free cash flow for another two years as the book runs off. We expect remittances of around EUR 250 million by 2019, plus or minus hedge results. For holding, the head office expenses and the cost of debt are a reduction to overall free cash flow. In addition, any restructuring charges taken as special items will also reduce free cash flow in the near term. Let me also mention once more that our banking business is not included in our operating capital generation. Therefore, the banking business will contribute to the group own funds only when they upstream capital to the holding company.
As a reminder, we define free cash flow available to shareholders as net remittances from operating units minus holding cost. This is underpinned largely by own fund generations, as well as the reduction of capital requirements and the gradual release of excess capital. We expect the free cash flow to continue to be in a range around the net operating result of the ongoing business. We gave that guidance at the IPO and have announced today that we maintain this same guidance in the coming years. In the next slide, you can see also our dividend policies has also remained unchanged. We have demonstrated discipline in adhering to our dividend policy by paying EUR 2.3 billion to shareholders since the IPO in the form of ordinary dividends and share buybacks.
Going forward, we continue to target an ordinary dividend payout ratio of 40%-50% of IFRS net operating result of the ongoing business. Predictability and sustainability of the ordinary dividend are important considerations. As part of this, interim dividends continue to be set at 40% of prior full year dividend per share. When we have excess capital, we will either invest it in value creating opportunities or return it to shareholders in the most efficient way. In the last part of my presentation, I would like to take you through the targets we set for NN Group and each of our reporting segments. We continue to focus on three areas: earnings improvement, cost reductions, and free cash flow generation. This is reflected in an NN Group operating result growth target of 5%-7% on average in the medium term.
A EUR 350 million expense reduction by 2020 for the entities in the scope of the integration. As I mentioned on the previous slide, the guidance that under normal circumstances, we continue to expect to generate free cash flow available to shareholders in a range around the net operating result of the ongoing business. Note that our earnings growth target is based on the 2017 operating result. This includes EUR 90 million of private equity dividends and non-recurring items in the first nine months, and incorporates Delta Lloyd only from the 1st of April. Moving one level lower, in the next slide, you can see our medium-term targets for each reporting segment. In our business units, we continue to concentrate on earnings improvements. In Netherlands Life, we will expect to be able to keep our operating result broadly stable.
We see pressure on the investment and technical margin, as well as on fees and premium-based revenues. We aim to compensate this by expense reduction and investing in higher yielding assets. The target combined ratio for the non-life is 97% or below, based on the new calculation methodology. We are taking actions to get there via a combination of expense reductions and improving our underwriting results. In Europe and Japan, we expect to accelerate our earnings growth. We have increased the target to mid-to-high single digit. For our asset manager, we continue to target a mid-single digit growth rate, while for our banking business, we target a 10% or higher return on equity. To conclude, these are my takeaways. We deliver on our IPO targets and are confident we can deliver on our new targets.
We continue to reduce our expenses. Accelerated by the Delta Lloyd transaction, have set a new cost savings target of EUR 350 million by 2020. On top of that, our capital framework, dividend policy, group operating result growth target, and free cash flow guidance remain unchanged. Thank you very much for your attention. I will now hand it over to Karin.
Thank you very much, Delfin. We will now take a break for about 30 minutes. In the lounge, there will be coffee, tea, other refreshments. We will call you back in time for the next presentation, which will be from Jan-Hendrik. Followed by the Q&A session. For those following the webcast, we will call you back at 5 minutes past 10:00 A.M. CET sharp. All right. Welcome back. I hope you enjoyed a nice cup of coffee in the lounge. Can I please ask you to switch off your phones again? I would now like to invite our Chief Risk Officer, Jan-Hendrik Erasmus, to come onto the stage and present to you on how we manage risk for value.
After that session, we will have our Q&A session where you can ask all your questions to Lard, Delfin, and Jan-Hendrik. Over to you.
Thank you, Karin, and good morning, everyone. During my presentation today, I would like to provide you with an update on. I will first introduce our risk framework and explain how we have been managing the risks arising from the Delta Lloyd transaction. After that, I will talk you through how we are optimizing our asset allocation to improve risk versus return. I will go a bit deeper into our overall risk profile. For example, our sensitivities and how our balance sheet would look under a few macro scenarios. I will finish my presentation with a brief update on the Japan Closed Block VA and our hedging program there. I'm the last speaker before the Q&A. I'll do my best to keep things interesting.
Let me start by briefly taking you through our overall risk framework and how we think about decision making in the context of our risk appetite. We have three overall risk appetite statements. Firstly, we take strategic decisions in a balanced way by considering not only risk and return, but also the needs of all of our stakeholders, customers, shareholders, and employees. We aim to be as rigorous as possible when we assess opportunities to deploy capital. The second risk appetite statement says that we want to avoid being forced to raise equity after a one in 20 event. This means that we need to have enough capital and liquidity to recapitalize all entities after a one in 20 event. This ties back to our cash capital requirement, which, as Delfin already mentioned, is currently in the upper half of our target range following the Delta Lloyd acquisition.
We expect our cash capital requirement will reduce again after we have completed the legal mergers of the Dutch entities. Finally, our third risk appetite statement is that we aim to conduct our business in a professional manner, and that we will ensure that our values, care, clear, and commit are at the heart of everything we do. We have a risk control framework in place to ensure we operate within our risk appetite. The risk appetite statements are further supported by risk limits, which apply at group level and which are also cascaded to the units. Taken together, these elements ensure that NN Group operates in a controlled manner. Delta Lloyd. Of course, doing a large transaction like the Delta Lloyd acquisition comes with a lot of risk. Of course, we're also managing this risk. We undertook significant preparatory work, including targeted due diligence.
We flagged some actuarial adjustments when we announced the recommended transaction on the 23rd of December last year. These have landed broadly in line with our expectations. Immediately after completing the acquisition, we implemented our NN risk governance and policies. Essentially all the NN Group policies became applicable to the Delta Lloyd units after day one. Units had to apply for waivers where they could not adhere to the policies. This means we know and understand where the gaps are and that we have an agreed plan on when and how these will be closed. We have a dedicated integration management office and many people in each business unit specifically dedicated to the integration. They have developed detailed bottom-up integration plans for all the units and departments to ensure a smooth and successful integration of the two companies.
In terms of technology and systems, we need to balance speed, functionality, of course, simplicity. This means we will not try to go for best of breed everywhere, we certainly won't reinvent the wheel. Instead, we'll use solutions that work. For example, in finance and HR and risk in head office, we are currently migrating Delta Lloyd onto the NN systems. We sometimes say slow is smooth and smooth is fast, we think that's certainly true for an integration project. As you probably know, NN Group uses a partially internal model, an approved partial internal model, I should say, or PIM, to calculate our solvency capital requirement. It's a partial model because the NN insurance entities have internal model components, while the Delta Lloyd entities and our European insurance businesses are on the standard formula.
It's also partial because operational risk capital is calculated using the standard formula for all entities. The combined requirements from our internal model and standard formula entities gives our basic solvency capital requirement. We add operational risk, the loss-absorbing capacity of deferred tax, and our non-Solvency II entities such as Japan Life and NN Investment Partners, our in-house asset manager. As Delfin already mentioned, the banking business is not reflected in the SCR due to NN Group's financial conglomerate designation. All these components combine to a total solvency capital requirement of EUR 7.8 billion at the end of the third quarter. We are currently working towards expanding the scope of our internal model to include the Dutch Delta Lloyd units. This will allow us to take risk-based decisions in a consistent manner across the Dutch units.
It's quite an extensive project, as the expansion of the scope of our internal model is formally classified as a major model change, and requires a similar level of documentation and rigor as the original partial internal model application. Let me now turn to the asset side of our balance sheet for the next few slides. The main message here is that we have a relatively defensive asset mix, with a large allocation to fixed income assets. After the acquisition of Delta Lloyd, the composition of our portfolio became slightly more diverse, with a small increase in fixed income assets and a small decrease in equity. The overall credit quality of our portfolio hasn't materially changed. Zooming in on the fixed income portfolio, more than half is invested in government bonds, and we have sizable allocations to mortgages, corporate bonds, and corporate loans. Turning to the next slide.
Around 90% of our government bond portfolio is invested in high-quality bonds with a credit rating of single A or better. From a geographical perspective, our largest holdings are in Dutch, German, French, and Japanese government bonds. With the inclusion of Delta Lloyd, our geographical spread diversified slightly, as Delta Lloyd had relatively more Spanish and less Italian bonds than NN. We continue to review these positions. Overall, we hold a diverse and high-quality portfolio, which provides opportunities to selectively move to higher yielding assets going forward. Let's take a closer look at our mortgage book. The majority of these mortgages were originated by NN Bank and transferred to the insurance entities' balance sheets and to our NN IP mortgage fund. We have around EUR 25 billion of mortgages on the balance sheet of our insurance companies.
We think this is a good idea because the illiquid nature of the insurance liabilities allows us to match these liabilities with less liquid assets that deliver attractive spreads. In the top left chart, you can see that the Dutch mortgage spreads have been holding up well in recent years. While the return is attractive, we also feel comfortable with the risks in our mortgage book for several reasons. Firstly, NN Group has a long history in selling mortgages in the Netherlands. We have built up a lot of expertise in underwriting, servicing, valuation, and the risk management of Dutch mortgage books. Because most of the mortgages are originated by NN Bank, and because the underwriting and servicing is primarily done in-house, we can set the underwriting criteria ourselves and therefore have a very good view on the underlying risks associated with these mortgages.
This is also evidenced by the low losses, less than 10 basis points per annum on average over the last five years, that we see on our mortgage book. We also saw very low losses during the financial crisis. Our mortgage portfolio is very well collateralized, with an average loan-to-value of 80% and around 30% backed by the Dutch Guarantee Fund. Loan-to-values have been decreasing in recent years, supported by increases in Dutch property prices and stricter government regulation around minimum underwriting criteria. Moving to the next slide. In the top left chart, you can see the expected return on required capital for our main asset classes. This is the return divided by the additional capital we have to hold for these asset classes after diversification. You can see that mortgages, real estate, and corporate bonds are more attractive than, say, equities and high-quality government bonds.
Within NN Life, we have been selectively investing in high-yielding assets in recent years, and from 2016, we have reinvested EUR 5.4 billion in mortgages, corporate bonds, and real estate. The defensive asset mix of Delta Lloyd at day one also allows for improvement in risk return, and so far, we have already sold EUR 1 billion of govies, which we are investing in a combination of mortgages, commercial real estate loans, and emerging market debt. Going forward, we will selectively look for opportunities to increase our returns by further increasing our allocation to mortgages, corporate bonds, and real estate while reducing our exposure to government bonds. We will, of course, do this in a rational and disciplined way, and only when market conditions allow. Selling government bonds to invest in high yielding assets will improve our expected Solvency II capital generation, and consequently, our free cash flow generation.
Note that it may have a negative impact on the IFRS investment margin, as that is driven for NN by historic book yields and not current market yields. There are three points I want you to take away from this slide. First, as you can see in the chart, the risk profile of the group didn't materially change with the acquisition of Delta Lloyd. Second, longevity risk is the largest risk, followed by spread risk and equity risk. Third, please be aware that the risks in the chart are on a pre-diversification basis. After diversification, the solvency capital requirement of market and non-market risks is relatively more balanced. The reason is that the market risks, spread risk, equity, and interest rates diversify better than the non-market risks do. Let's have a closer look at our biggest risk, longevity, on the next slide.
We have around EUR 100 billion of liabilities exposed to longevity risk, mainly from our large group pension books in the Netherlands. Longevity risk is essentially the risk that we have to make more payments to our customers than we currently expect, because they live longer than we currently expect. Note that this risk is amplified by the discounting effect in the current low interest rate environment. To give you a bit more color on what I mean with living longer than expected, let's take a closer look at the graph on this slide. Here you see the observed life expectancy of males in the past, and then from there, three different lines projected into the future. The bottom line is the expected increase in life expectancy according to the latest estimates from the Dutch Central Bureau of Statistics, the CBS.
They estimate that life expectancy after retirement of a male is going to increase by another 2.2 years over the next 20 years. The middle line is the life expectancy we use in our reserving and reflects the fact that we expect that our policy holders will live longer on average than the Dutch population. In terms of numbers, we assume that our male customers will live just more than a year longer than the average of the Dutch population. Finally, the top line is the life expectancy in a one in 200 shock event, which is effectively our SCR for longevity risk. This means that for a male who will retire in 20 years, we hold capital against him living another 2.3 years longer than we assume in our reserves.
On top of all that, also note that we have a risk margin of EUR 5.3 billion for the Dutch life companies, which is largely driven by longevity risk, and which adds to the overall level of prudence in our reserves. We are actively managing our longevity risk, and we have been doing that in the past by shifting to pension products with less guarantees, repricing at renewal date, and shifting to DC products. In addition, I am pleased to announce today that NN Life recently completed its first longevity transaction. The transaction is a population-based hedge with Hannover Re, and was completed at an attractive implied cost of capital for NN. With this transaction, we effectively offload part of our longevity trend risk for more than EUR 3 billion of liabilities.
The capital treatment of this specific deal has been approved by the DNB, and will result in a reduction in the longevity SCR of the Netherlands Life business by approximately EUR 35 million. The transaction is structured in such a manner that it provides effective risk transfer. It will provide risk and SCR relief over a long period. The term of the transaction is 20 years, but we are protected against a longer time period via a commutation factor mechanism that applies at maturity. In simple terms, if longevity improvements have been much stronger than expected, this will be assumed to continue until the liabilities run off and NN will receive a payment under the hedge. Also, the attachment point, i.e. the point where the structure will start paying out, is relatively close to our best estimate, which helps maintain the SCR relief and effective risk transfer over time.
Going forward, we will continue to explore opportunities to manage our longevity risk through reinsurance or perhaps additional index-based transactions. Index-based transactions will continue to be subject to regulatory approval. Note that Delta Lloyd Life's existing longevity hedge benefit in the SCR will materially fall away under NN's internal model. On the next slide, you can see our Solvency II sensitivities. These haven't changed much since we first showed them to you at the second quarter for the combined group. What is new today is that we have indicated a tolerance for each of them. Very simply, we want our interest rate sensitivities to stay below 10% and our investment risk sensitivities to stay below 15%. We actively manage the balance sheet to keep the sensitivities within these acceptable levels.
We have also taken today, our Capital Markets Day, as an opportunity to slightly modify the disclosed sensitivities for interest rate steepening and real estate. We noticed that those scenarios were relatively severe compared to the other sensitivities we disclosed and wanted to bring them more in line. I want to spend some time to discuss our sensitivity to government bond and corporate bond spreads. As I have said before, we have illiquid liabilities, which means we can invest for the long term. Our biggest exposure is therefore not to market spread risk, but to actual credit default risk. Spread movements are, however, part of the Solvency II framework, and you will have seen that market movements can give rise to quite some volatility quarter to quarter. An important element to keep in mind is that we expect this volatility to even out in the long run.
In the scenario of a 50 basis point widening of our corporate bond spreads, our Solvency II ratio increases with approximately 13 percentage points. This impact is somewhat counterintuitive and is driven by the volatility adjuster, or VOLA, which is an add-on to the discount rate used to calculate the value of insurance liabilities. The VOLA is based on the spreads of the average European insurer's investment portfolio, and our sensitivity is driven by the fact that we are underweight corporates versus the EIOPA reference portfolio. With corporate spreads widening, the value of our assets decrease, but the value of our liabilities decrease even more, which delivers this positive impact to our Solvency II ratio. This has proven to be a nice offset to our equity risk because when spreads widen, equities are often moving in the opposite direction.
Let me now take you through a few macro scenarios to demonstrate the resilience of our balance sheet. The first two scenarios are actual past events, while the third is a hypothetical scenario. Note that the impact of these scenarios is based on our balance sheet at the end of the third quarter 2017. The first scenario mimics the actual market movements we observed during the financial crisis of 2008. Equity markets dropped significantly, and while interest rates fell, sovereign spreads increased slightly and corporate bond spreads increased substantially. The combined impact of this scenario on our Solvency II ratio is positive. In the second scenario, the sovereign crisis of 2011, we saw a flight to safety in that the spreads on government bonds, except for AAA, and corporate bonds increased substantially with decreasing interest rates.
Similar to the first scenario, our Solvency II ratio is expected to be resilient in this scenario, assisted primarily by the effects of the VOLA. In the simple hypothetical accelerated tapering scenario, we assumed interest rates to rise with the widening of government bond spreads. At the same time, we assumed corporate bond spreads and equity markets would remain flat. This scenario would negatively impact our Solvency II ratio because of the increased sovereign bond spreads. This is slightly offset by a positive impact from interest rates. What can we learn from these scenarios? Well, first, our Solvency II balance sheet is exposed to spread widening of core government bonds. Second, our corporate spread sensitivity provides a nice natural hedge to market turbulence.
We aim to run a balance sheet which is resilient to market scenarios, and together with our strong Solvency II ratio of 204 percentage points, we are well positioned to manage it for stable outcomes through the cycle. As we have shown earlier, the sensitivity of our solvency ratio to parallel interest rate movements is limited and comfortably within our appetite. This is the result of active management of our interest rate position, in which we do not only look at parallel shocks, of course, but also at changes in the shape of the curve. As you can see in the graph, which combines the cash flow profiles of NN and DL Life, we continue to match asset and liability cash flows where appropriate and where possible.
We won't do this at any cost, especially at the long end of the curve, because we don't want to be a forced buyer of assets where markets are not sufficiently deep and liquid. You can see that we are also sensitive to a curve steepening beyond the 20 year last liquid point. This is due to the application of the ultimate forward rate, the UFR, in the valuation of our liabilities. They are therefore not sensitive to interest rate movements beyond the last liquid point, while the assets in that scenario would, of course, decrease in value when rates go up. As I get to the end of my presentation, let me give you a short update on the Japan Closed Block VA portfolio. The short message here is that everything is going exactly on plan.
The portfolio is running off quickly, driven by maturities of the products, and the account value decreased from roughly EUR 8 billion at year-end 2016 to just over EUR 5 billion at the end of September this year. As you know, we have an active hedge program in place to hedge liability movements. Taken overall in the past eight years, the hedge program has proven to be effective. As the book continues to run off, we expect NN Re in the Netherlands to upstream EUR 250 million by the end of 2019, ± hedge results. In conclusion, I would like you to take away the following. We are an insurance group, so taking and managing risk is at the heart of our business. It's something we do well and want to continue to do well.
Our operational and financial control frameworks ensure that NN Group remains in control and operates within our risk appetite. We have a prudent balance sheet and a liability profile, which provides us with opportunities to continue to manage risk to drive additional value creation. At the same time, we will actively manage and protect the resilience of our balance sheet. That brings me to the end of my presentation. Thank you for your attention, and back to Karin.
Thank you very much, Jan-Hendrik. Please stay here indeed. I'm sure you've got lots of burning questions, and we are curious to hear what you have to ask for us. I would now like to ask Lard and Delfin to join me back on the stage here. On a practical note, can I please ask you to raise your hands if you have a question? There's already one on this side and on that side. Please wait for the microphone so that those following us on the live webcast can also hear your question. Then can I please ask you to state your name and the name of your company? Then, please, a reminder, two questions each. We can come back for a second round, but we want to allow everyone the ability to raise their questions.
I think I saw Arjan first, then I'll get back to you, Nadine.
Good.
All right. Arjan.
Thank you. Arjan van Veen, UBS. Two questions, if I may-
Sure
on capital generation and capital deployment. On capital generation, if we look at the first nine months of the year, from slide B13, EUR 1.1 billion capital generation. At Delta Lloyd, it was EUR 110 million, you said, of that for two quarters. If we annualize that, it looks like a run rate of about EUR 1.5 billion. The question is, how do we think about that number on a basis? Is there a one-off in there that we need to adjust for? Obviously, as the cash or the expense savings are delivered, do they just fall through into that cash generation number? Second question is on capital deployment. Your solvency ratio is back above 200%. I forget the word you used, but you're comfortable with the gearing level. You've got EUR 575 million of debt to pay down in the fourth quarter.
If I look at your debt profile, it's quite pushed out, so there doesn't seem to be immediate debt repayment to come up. I'm just thinking, how do we think about capital deployment over and above dividends from here? In particular, what are the key constraints? Is there a gearing constraint or a Solvency II constraint?
Good. Thank you. Thank you very much. First question on the capital generation. I think that we've always been very prudent on providing a run rate or a guidance for the future. I think we've got now the benefit of looking at what has happened over the last seven quarters. Since the introduction of Solvency II on the 1st of January 2016, we saw EUR 2 billion of capital generation, EUR 1.7 billion coming from own fund generation and EUR 300 million approximately are related to the reduction of SCR. Obviously, every quarter has been slightly up or down, depending on what has been the actual deviation from expectations on that quarter. Also, how markets move has varied, how much has been the surplus investment over that period of time. You already have one reference of seven quarters.
In another slide, I show what was the capital generation on the last 3 quarters, which is more recent. It only includes Delta Lloyd over a period of 2 quarters, since 2nd quarter of the year. You can see, if you like, not on 1 quarter to another, that's why we also round the amounts to EUR billion. You see in a longer period of time, some stability on this capital generation. Going forward, there will continue being factors affecting the amount of capital generation in the quarter. 1 very important one is the fact of the markets moving. As the spreads move, the investment surplus contribution in the quarter will be different. What is the actual contribution from non-life, from Japan Life, from the pension funds? You will have that variation from 1 quarter to another.
I think that, as I said, looking at a period of 7 quarters, you see some, I would say, stability in terms of the capital generation going forward. You talk about the capital structure and the level of leverage. Indeed, our level of leverage at EUR 6.1 billion of notional debt is comfortable. I mentioned that the average cost of that debt is good, as we managed to refinance part of that on the NN Group side in the recent past. That give us attractive cost of debt. We did, earlier this week, reduce our leverage by EUR 550 million due to the maturity of the senior debt coming from the Delta Lloyd side. The next normal possibility to reduce debt will come in 2020, when EUR 200 million of senior debt comes to maturity. We've got the financial flexibility in terms of the strong capital generation.
We could, in theory, reduce farther the level of debt. At this point of time, we think that our capital structure also in terms of the leverage, which is around 12 times, is very strong. We don't see any particular reason to act in the short term. Obviously, we will observe how things develop going forward. In terms of dividends or how we will use our existing capital or surplus capital, if you want to call it like this, we will continue be acting as we have done so far. We like the predictability in the form of our payment of ordinary dividends. We flagged in the past that the focus now is on bringing the acquisition of Delta Lloyd to a good port. The focus is on the integration.
We flagged that share buybacks is something that we will not initiate in the short term. We have other priorities. When we consider that there is surplus capital and there is no opportunities to deploy it internally or any opportunity to do some bolt-on acquisitions, if the criteria that Lard explained are met, then we would pay it back to shareholders. The share buyback route is one that works very effectively for that purpose.
Yeah. That's very clear. Thanks.
Thanks. Over to Nadine with questions. Yeah.
Yes. This is Nadine van der Meulen from Morgan Stanley. First question to Lard. You mentioned you're focused on or expecting high growth in Insurance Europe. Can you elaborate a little bit on that? You're present in a wide number of countries. Some of those countries have ROEs below cost of capital, arguably. Would you be looking at divestments as well? Second question is for Delfin. On the Solvency II ratio, there's quite a few peers out there that give ranges for Solvency II, or at least sort of a top end of the range. We have an indication of where you want to be, ideally. Particularly, I'm asking in light of quite strong capital generation, which comfortably covers the dividend payout policy that you announced today. To what extent, how should we be thinking about that?
You have a history of quite significant additional capital return beyond base dividends. I can imagine you have your hands full with Delta Lloyd at the moment. How should we be thinking about that going forward? Thank you.
Yes. Let me take the first question, then Delfin, the second, if you're okay.
Yeah.
On the growth. This afternoon, Robin Spencer, who's responsible for the businesses in Europe and in Japan, will give a presentation on the growth pattern that we've seen over the last years. He will show a chart, which I was just looking at, which I think is quite compelling because it basically says that we were able in the last If you compare the 9 months of 2017 with the 9 months 2014, it's basically doubled our VNB in terms of profitable sales. Also, we have markedly improved the returns on many of the businesses. He will actually go back to that particular slide on return on equity per unit that we also presented at the time of 2015, and he will expand on that further.
What we're seeing is if I look back at what Robin and his team have done, a couple of years ago, we have started down a path to change the product set from, let's say, capital-intense products, more to capital-light products and protection products. In the time of also volatile financial markets, we ensured that in that period, we kept the cost under control and built out our distribution. We always said that we believed that the moment that GDP growth would pick up, you would see growth coming back. We wanted to be sure that at that point in time, that we were positioned with the build-out of the distribution platforms, with having a good product set that we've shifted towards, and also having an efficient structure that we were able to capture that growth profitably. That is actually what you're seeing.
That's also what is driving our upgrade of the expectation for the coming years, where we believe that we can see an acceleration of growth. That's one thing. When it comes to the portfolio, which is the second piece of your question. When it comes to the portfolio of businesses, continuously we evaluate the portfolio of businesses. We're not emotionally attached to any of our businesses. We want to judge them on their performance, on the attractiveness, medium-term and longer-term of a particular market. We ask ourselves questions, are we the right owner? Do we have scale? If we do not have the scale, do we see appropriate opportunity to build out the scale, either organically or inorganically? We take our views, and if at a certain point in time we feel that we need to act, we act. We have done so.
In the recent past, we have acted on the reinsurance business in Ireland. We have acted on a broker in the Netherlands. We've acted on the Luxembourg business, which Robin has exited. In that sense, this is something that we see as an ongoing way to manage the portfolio into the higher return areas that we'd like to have it, and also sustainable, a simple strong business profile for the longer term. Delfin.
Setting solvency to targets or ranges, that's something that we have not done in the past. The reason being is, as I mentioned in my presentation, is that we like to have Maybe we emphasize more two elements. One is the importance on fungibility of capital. Not all solvency ratios means the same. It depends on what is the fungibility, what is the capacity to distribute those funds from one legal entity to another when it is required. That's one element that we emphasize. The other is to make our decisions risk-based. That means that our approach when we look at our capital structure is based on having as much as possible fungible capital. That's why we set the target in terms of the range of the cash capital at holding, the EUR 0.5 billion-EUR 1.5 billion guidance target that we've got.
Doesn't mean that we cannot be a certain point of time out of that range, on the up or the down, but that gives you the philosophy of how we approach that. We define this cash capital at holding in order to make sure that we've got enough cash as to cover 12 months of our holding expenses, and that also includes the cost of our debt. Plus, in addition to that, as also Jan -Hendrik has mentioned in his presentation, looking at any point of time, depending on the risk that we have taken at that point of time, and how the different subsidiaries are capitalized to make sure that in a 1 in 20 stress event, that we've got enough capital at the holding in order to capitalize those subsidiaries without having the need to go to the capital markets or do a rights issue.
That's the approach that we think it works very well in practice, and that enforces this holistic view of how we manage capital.
Thank you. I saw Farooq with the pink shirt. Yeah.
Hi, thank you very much. It's Farooq Hanif from Credit Suisse. You gave a list of things that you're going to do on capital synergies. Obviously, there were no numbers next to it, apart from the ones that you've achieved. Can you tell us, are those numbers going to be bigger than the EUR 350? Within that, is the PIM really the biggest element? That seemed to be what you were saying, so I just wanted to clarify that. The second question I have is, what is a 1 in 20 scenario? I know it might be a stochastic model, but what is a 1 in 20 sort of scenario for mortgage credit risk in the Netherlands?
That one-
You can cover the 1 in 20.
Yes.
No.
Sorry.
Indeed, in my presentation, I indicated the areas of future capital synergies. We already have benefited from around EUR 350 million of capital benefits. Going forward, indeed, the move of the Delta Lloyd Life and Delta Lloyd Non-Life business into the partial internal model is something that we expect to reduce the solvency capital requirements with the offset that we have mentioned several times due to the loss of the current longevity hedge benefit that applies to the solvency capital requirement of Delta Lloyd Life in the standard formula. We expect some benefits from that.
Also, with the merger of the legal entities, there is some reduction of the risk margin that we will expect when the legal mergers happen. I think in addition to that, there's going to be some improvement on funds as we capitalize some of the savings that we are incurring. As expenses reduce, there will be also some potential positive impact on the per unit cost that will be capitalized upfront on the own funds.
One moment, Farooq, so that it helps so the webcast can also follow it.
Apologies for pursuing, do you think there's more than EUR 350 to come from those things?
I think I very explicitly say that we're prudent until this has been materialized. We are not quantifying the amount of the capital synergies. My key message was, let's be prudent with the capital synergies up front. They will require some time to be generated.
On the one in 20.
One in 20, thank you for the question. It's not a simple answer. That's unfortunate in a way. Conceptually what it is that we use spreads in our models to value mortgages in the internal model. We have to find out what would a one in 20 spread event be for mortgages. Of course, we have all the macro drivers flowing into that. Maybe a better way to cover it is to say that the one in 20 is a joint one in 20. It's across all the scenarios. We tend to think more about one in 10 per risk type. Those sensitivities we disclose, they are closer to one in 10s. They're not exactly one in 10s, but something like equities, I think 25% is close to a one in 10 event, or closer.
Property, I think 10% is closer to a one in 10 event. These things combine. You can obviously see the one in 200s from the standard formula. In general, we find that our own one in 200s are a bit bigger than the ones implied by the standard formula. When they diversify, it's also a bit more of a realistic diversification that comes back, which gets us to that model. There's not an easy way to answer it, but hopefully that gives you a feel for where it comes out.
Okay. Here in the front, Robin, and then I'll get back to Benoit and Michael. Patrick.
Yes. Robin van den Broek, Mediobanca. I think the reiteration of your free cash flow guidance is very helpful. Still you have a component that's running off by 2020, the Japan Closed Block VA. That, of course, of your total net operating results, that part of free cash flow will be lower than the previous three years. I'm still wondering if you're going to be able to pluck that gap, basically, because it's not part of your operating results by 2020. Your free cash flow guidance, is that run-off book basically a margin to that guidance? Should we expect that maybe the dividends from the bank will come in by that time, that will plug the hole? I also understand that the re-risking element will drive down your investment margin under IFRS, but will improve your capital generation.
I guess that's also something that will help bridging that gap. Basically, my question in simple is the ending for 2020, does that guidance, you think, stand on a standalone basis?
Yes.
That's the first question. The second one also relates to future capital synergies. With the PIM integration, you're going to do a lot of integration, internal model. I can only imagine how many assumptions are in that model. With Q2, you've aligned the investment expense assumption, which led to a large gain on the NL Life part, and a loss on the Delta Lloyd Life part. I assume that over the next year, also in collaboration with the Dutch Central Bank, you're going to look at a lot more assumptions to recalibrate given the scale of this integration that could potentially lead to further capital synergies. Any words on that would be very much appreciated.
I suggest get Jan-Hendrik to the PIM.
Yes, exactly.
To start with Delta.
Yes. No, thank you very much. It would be a bit foolish to make a guidance now on the free cash flow to be in the range of the operating result and have doubts about 2020 that certainly is within this medium term. The short answer is yes. We feel confident. There are a lot of different factors affecting. It's true that EUR 250 million of free cash flow is going to come from Japan Closed Block VA until 2019. That means that we cannot rely on additional cash flows coming from Japan Closed Block VA. What is true is that we have additional growth and new business coming from Europe, coming from Japan. Also, the integration of Delta Lloyd. By 2019, 2020, we will have already all the benefits coming from the reduction of operating expenses.
You mentioned the bank and other considerations that will help generate that.
Most of those elements are also baked.
One moment, Robin. Just then the.
Just a sec, otherwise people won't follow it on the webcast.
On the webcast.
Most of those elements are also baked into that 5%-7% operating result CAGR. To get the free cash flow to grow with that in line, you need something that's outside of that scope, basically, like the Bank dividend, for example.
No, you're right. Most of it is included also within the operating result, the bank is not. Also there is the behavior of the capital generation under Solvency II is different at IFRS. There is an additional investment surplus that we achieve through the Solvency II, for example.
The investment portfolio of Delta Lloyd has been marked to market as of April 1st. That means that the investment yield coming from Delta Lloyd, as from that point of view, from that point of time, is basically the market yield. That means that when we've got the reinvestment of these assets, they provide, under Solvency II, significantly more upside as well. There are different elements that help us provide this to maintain this guidance. In addition to that, let me remind everyone that the free cash flow is not only the capital generation. That's why in that slide, you also see that there is an element that our current strong level of capital allows us, when and if required, to use part of this surplus capital to support the free cash flow generation.
Yeah. Thank you, Robin, for the question on assumption alignment and the PIM. When we published the joint accounts on the 17th of August this year, we flagged assumption alignments in three areas. It was the investment expenses you've mentioned, longevity that we've discussed, also in December, the valuation of mortgages. We really try to align all the assumptions in the base balance sheet already. There is, from our perspective, nothing that we can see that we need to align after this. Also, the DNB is not really involved in the base balance sheet so much. The process with them is on the solvency capital requirement, where we have to agree with them, how do we calculate our regulatory capital requirements. Now, there, Delta Lloyd is on the standard formula, NN has an approved partial internal model.
The process we are now going through is a process of justifying why we feel that the NN model, with modifications where necessary, is appropriate also for the business of Delta Lloyd. Of course, given it's an in-market acquisition and sort of the same risks and the same markets and the same products, it's not rocket science completely, but it is a process that you have to just go through to demonstrate that this model works also for Delta Lloyd. At the end of it, hopefully, we can also agree with our regulator that it is a sensible model to use start calculating the SCR for the Delta Lloyd units in scope of the project, also with our internal model.
Okay. Thank you for that, gentlemen. Benoit Petrarque.
Yeah, Benoit Petrarque from Kepler Cheuvreux. Thanks for the question. The first one is on M&A. Basically, in which country do you see opportunity or the need to grow? Also, more broadly, in terms of long-term strategy, is there a need to diversify a bit from the Netherlands? Is there maybe concentration issue post Delta Lloyd acquisition? Is there willingness to grow a bit outside now the Netherlands? That would be the first question. The second one is on the net, the holding cash range, EUR 0.5 billion-EUR 1.5 billion. Just want to make sure that the buffer you have at holding level, the range includes, basically, a buffer for potential macro shocks like end of QE, which is quite likely by the end of 2020. Do we need to add a potential buffer for volatility on top of the EUR 1.5 billion?
Do we need to take into account maybe a M&A buffer, something special there? Do you see any need on that side? The last one will be on the dividend from the bank.
Maybe let's do the two.
Yeah.
We'll come back.
Few years
A chance for questions.
Yeah. Let me start with the.
Maybe on M&A, Lard?
Yeah. I'll start with the profile of the group and how that evolves in our view and any M&A. Let's first start with the profile of the group. If you look at the earnings, it depends a little bit on the metric that you look at, but if you look at the earnings diversification, most of it is coming from the Dutch businesses. Obviously, that has been cemented even more right after the acquisition with Delta Lloyd, which is largely a Dutch Benelux business. That's number one. Also moving forward, so yes, Robin and the team are doing their best, and Satish as well, to drive profitable growth in the future, which creates future earnings pools and future cash flows and stuff like that. Let's also agree that we aim to improve the non-life business profitability in the Netherlands as well.
I expect near term, the overall composition of the group, in that sense, from an earnings diversification profile, not to change dramatically. As we grow externally, outside of the Netherlands, as we grow over time, it will be a gradual process, you will see more contribution coming from the international area, the asset management area, et cetera, and it will become a more balanced picture. I think near term, I think I was quite clear on it, and certainly when we also aim to improve the profitability of the non-life business. When it comes to M&A, let's ground ourselves here. We've just completed, in the second quarter, quite a large transaction, right? Deployed EUR 2.4 billion of capital. I want to make sure that we deliver on the goods, that we get the synergies out, and that we deliver on the goods.
That's the first and foremost priority. What I aim to say about any other M&A is that if you look longer term, that's also a bit the nature of this meeting, is that we are open to acquisition opportunities if they present themselves, and that we, of course, look at them seriously. It's largely bolt-on acquisition. I like in-market. We like in-market. We like existing businesses that we have, markets we know and understand, and that we can use to scale up and to get the benefits of scale. As if and when this comes, we have a very rigorous
framework to assess these kinds of opportunities. Most importantly, our priority today is deliver the Delta Lloyd synergetic benefits and execute.
Thanks.
Delfin.
On the range?
Yeah. The cash capital of holding this range of 0.5 to 1.5, Benoit, is basically trying to cover a shock of one in 20. One in 20 covers a significant turbulence in the market or any other event that occurs. How does that work? First, we run the scenarios of the different shocks that will happen in one in 20, and you see each of the subsidiaries, where do they stand in terms of the level of capital. If they become lower than the capital required, then we inject the capital from the holding company. That is what we cover within this range. The actual calculation of this one in 20 shocks, because keep in mind that our subsidiaries are well capitalized.
Obviously, in a scenario of one in 20, the subsidiary that will be largest impacted is NN Life, with 218%, or Delta Lloyd at 149% will be earlier impacted by a need to inject capital. The current need in order to do that is well within the range of 0.5 to 1.5. As has been mentioned during the presentation, we do expect that when you do the legal merger, then the resulting merged entity has a better level of capitalization. Basically, the need to inject capital into this new entity will be lower in a shock of one in 20.
Thank you. Michael van Velthoven, then I'll get to you, Patrick.
Michael van Velthoven, Bank of America Merrill Lynch. Coming back to some of the things that you said earlier and looking at the free cash flow versus net operating earnings development, and sort of falling away of the Japan VA book. The bank will start contributing, at some point, to that to fill that hole. Your Dutch business seems to be the one that needs to do a lot of that gap filling. The liability profile that's shown in Jan -Hendrik's presentation suggests that the SCR for the Dutch business doesn't really come down before 2030. It has to be excess capital in the Dutch business that needs to be the driver. Your solvency ratio, including Delta Lloyd, is about 195, as you said, in line with your Dutch peers, roughly. Well, for the local businesses. They're at the top end of where they want to be.
Is there a reason why your Dutch solvency ratio needs to be materially higher or lower, or can be materially higher or lower than your peers in the long run? Or are you comfortable with being sort of where they have committed to needing to be? Thank you.
Thanks.
I think I see two questions there. Starting with the last one, which is maybe simpler or shorter. No, we do not see any particular need why we need to be more or less capitalized at any of our peers. In any event, we don't look at any one of our competitors. We just look at our own sensitivities, our own risk profile, and we make decisions based on that ourself. In terms of the free cash flow versus the net operating result, as you mentioned a bank, but it's not only surplus capital. I mentioned before that in terms of the investment surplus that we do on the investments is larger under Solvency II, that it is under the operating results.
As we basically, on our large Dutch investment portfolio, as we re-risk, we've got some additional capital generation versus the one that you see reflected within the investment margin, within the IFRS investment margin. There are other aspects. When you write a positive new business, that is not reflected upfront within your capital generation, but under Solvency II, you indeed generate the net present value of this value of new business. The contribution of positive value of new business might come earlier and does come earlier in some of our markets in Europe, as I think Robin will touch later. There are different factors. The way we see this contribution from surplus capital is a good thing to have.
The fact that you are well capitalized, there is a buffer on which you can rely on when the market or your operating performance is below expectations or below the recent past, and that helps you to stabilize the free cash flow that we can dividend out to the holding company. I think that's a very nice feature to have. Actually, when you look at what has happened since the introduction of Solvency II, you can see that the operating capital generation was EUR 2 billion when you include the movement of own funds and the reduction of the SCR, and that compares with less than EUR 1.9 billion of free cash flow that has come to the holding. We already have a past.
The reality today is over the last 7 quarters, on average, we didn't have to reduce the solvency capital in order to generate the free cash flow that we have mentioned before. That's one of the reason that has allow us to, while at the same time we were paying to our shareholders EUR 2.3 billion of cash in terms of ordinary dividends and share buybacks, we accumulated additional solvency capital that allow us to do the Delta Lloyd acquisition with EUR 2.4 billion of cash, and still our level of solvency is very good. Because over that period of time, the solvency increased, and we use it in the acquisition of Delta Lloyd. The dynamics change. There are different aspects impacting the Solvency II. The increase on interest rates help us reduce the drag of UFR. So there is quite a few elements.
All together, and in simple terms, is what confirm us the ability to maintain this same guidance going forward.
Thank you. Then I'll go to Patrick, here in the front.
Thank you. We've seen quite a couple of changes with regulators around the world, including even the Netherlands, where Aegon got a bit more friendly treated. With the new Minister of Finance here in the Netherlands, have you experienced and seen any change in the way they look at the insurance industry? I would say that the Netherlands is probably one of the toughest, if not the toughest regulator in the world, and I know they're listening today, so they will know about this then. Have you seen any change? Also connected to this, great, the reinsurance transaction, but EUR 35 million from a total capital of EUR 5.3 billion is a sort of, I would say, dipping the toe in the water. Can you truly wade into it in the future? What is your take on this?
Do you want to take the DNB question?
Let me start, and then if Jan-Hendrik wishes to expand-
Jan
absolutely, he can. We deal with many regulators across the footprint. Of course, DNB is our group regulator. DNB, we have a good professional relationships like you should expect us to have with all the regulators, and especially also with the DNB. I haven't seen, and we haven't observed a change with the regulator. It's a prudent regulator, a professional regulator, and we have a good and constructive relationship with them. On the-
Minister of Finance.
Oh, the Minister of Finance. Yeah, of course. The Minister of Finance. We of course have regular interaction with the cabinet and with members of the cabinet, also with the Minister of Finance. I hope you understand that we do not disclose any content of let's say what we discuss there, but also that's a professional relationship that we have.
On the longevity hedge, I think you are right to flag that it is small. It's not a big financial change for our company. That's not why it's in the slides. It's more to flag a capability that we have been working on and that we will continue to have to work on, I think, if we want to do bigger amounts. For reinsurance, I would flag that it's not typically subject to regulatory approval. The index-based hedges are, because you need to figure out how you model them in your internal model. It's a bit more complicated. Yeah, it's a start. I think we cannot say much more than that today.
It is, I think, important that you realize that also for this very big risk type, we actively look at it, and we have some levers that we can pull into the future to manage our exposure.
Thank you. I'll go to Matthias, and then I'll come to you, Johnny.
Yes. Thank you. Matthias De Wit from Kempen. Just two questions. First, if I could come back on the longevity hedge. Is there, next to the SCR benefit, a risk margin benefit possible when you do such transactions? Sorry. Second question I had is on the re-risking you announced today. You mentioned that it negatively impacts the IFRS investment margin because that's based on book yields for NN, but that it's accretive to the Solvency II spread you generate. Is it fair to assume that your capital generation will grow much faster than IFRS earnings and then the 5.7% earnings you've been guiding for because of these opposing dynamics? Just linked to that, on the re-risk, what is the capital impact if you move from sovereigns to mortgages? Because it's quite complex with the dynamic volatility adjuster and the internal model.
Is there a big step-up in capital requirements we should expect because of that re-risk? There's also the Tier 3 admissibility, which changes. There are a lot of moving parts. I just wonder if you could share some details there.
Should I maybe take the first and the third one, and then Delfin, you take the IFRS?
For next time, let's limit to two questions, please, because there's a couple more people that want to raise questions. Thank you.
The first question is the longevity hedge and the risk margin benefit. The simple answer is, if it's a longevity hedge, you don't get a risk margin benefit. If it's longevity reinsurance, it's a legal term, and if it classifies as reinsurance, then you do get a risk margin benefit. This one, and we specifically call it a risk margin benefit, but that will be another transaction.
SCR requirements
I think you will not see a dramatic step up. It's not such a big difference that we will see. Also, we can't get assets at the right quality. When I spoke, I said rational and disciplined. We will only do this over time. It's not like we take on one day EUR 10 billion of govvies and move it immediately to EUR 10 billion of mortgages. You can't do that, and it will be gradually over time. I think you will not see that step change. I would also say that there are things going the other way. Like at the moment, we have a Tier 3 gap, and of course, if we add a little bit of SCR, it also increases our Tier 3 capacity. Also, adding mortgages may somehow help you justify loss absorbing capacity of deferred taxes.
There are other elements in play, but in general, I would expect a much more gradual evolution, and no surprises and no sudden big movements.
Thank you. On the dynamics of investment margin?
Yes. Thank you, Matthias. Actually, I love your question because it was the contrary to the previous one. The previous one is how can you justify the free cash flow, and yours is, it should be much more because of that. It's good because I think sometimes the truth is somewhere in the middle. That's why we say that it's approximately at the same level. It's true. The dynamics, it really varies what happens with your investment portfolio. Let me illustrate with one example. If you've got a mortgage currently within our NN Life portfolio, for example, and this mortgage matures and is replaced with another mortgage, which is at lower interest rates, no doubt we've got pressure on our investment margin. The investment margin decreases.
Under Solvency II, as that mortgage was already being accounted for the market yield, is reinvested at the market yield of the mortgage. Nothing changes. That is one of the reasons why, for this particular aspect, the capital generation is somehow higher than for the IFRS operating result or the investment margin. I think, of course, it depends what actions we take in terms of not just the reinvestment of assets that mature, but also as we have done it in the recent past. If we sell some of the government bonds and we allocate them directly into other higher yielding assets, that effect might be more accelerated. Because you're replacing actually a book yield, for example, of a government bond at 3%, you sell it, and you have a reinvestment, which is at let's say, 2.5% or 2.7% in a mortgage.
That means that under IFRS equity, you will have some negative impact, but in terms of the capital generation, it is not going to be neutral. It is going to be higher because you are replacing a market yield, for the sake of argument, of 1% versus the 2.5%. This is an element that plays a role in our capital generation. I think I have said enough about this one.
Thanks. Thanks, Delfin.
It is an important dynamic. Yep.
Johnny, I think, had the next question. Then I will come over back to that side.
Yeah. Hi. Thank you. It's Johnny Vo from Goldman Sachs. Just a philosophical question. Basically, we talk about IFRS, we talk about own funds generation. Why do you continue to link the dividend to a book value measure when you're focusing the business on market measures and things such as enhancing capital generation to the asset side, but also the benefit of interest rates rising would lower the liability unwind, which would benefit your capital generation. We still have a dividend linked to something that doesn't represent the economic reality. That's the first question. The second question is just regarding the merger of the two entities. Can we assume that the cash capital requirement of the holding would be the lower end of the buffer range once the entities merge and therefore everything else becomes excess at that point to distribute? Thank you.
Thank you. I think both are for you, Delfin.
Yeah. Good. I think you're right. The answer is, we link it to the IFRS operating result for simplicity. We have introduced Solvency II has been introduced soon after we have gone public as an IPO. Although at first, the new regulatory regime was not fully known, and as a consequence, you need to find a certain simplicity. I think still for generalist investors, it's nice to see the dividend related to a set of financial statements that we report every quarter, that they are audited, and that they give them comfort. Also, there is one advantage, or in our case, is that both of them are relatively linked. That's why when we talk about the free cash flow generation, we say it's approximately equal to the operating result after tax.
If you like, indirectly, but with the caveat that the free cash flow is going to fluctuate within a range, sometimes lower, sometimes higher. We are basically linking it both. We are saying that the free cash flow generation is approximately equal to the operating result, and the operating result is the base for which we pay the dividend. At the end, in this philosophical question, which I fully agree with you, we have found a very practical solution, which is Both are relatively linked, and we do it in relationship to the operating result. That's the reason. Yes, to the second question. When the legal merger of the Dutch entities take place, they need to inject capital after one in 20 reduces. As a consequence, that capital requirement after one in 20 reduces.
Indeed, currently, within that range of 0.5-1.5, when you add the 1 in 20 plus the 12 months of holding cost, we are in the upper half of that. After the legal merger, everything else being equal, it will be below in the low half.
Thank you, Delfin. Then I'll go to William Hawkins, then I'll get to you, Claudia. Here, next to the pillar. Yeah.
Hi. Thank you. I'm William Hawkins from KBW. Just one observation that I'd like you to kind of come back on. You showed that stress test slide for your Solvency II ratios.
You said if you're back testing 2008, 2011 scenarios, we'd see your ratio go up. At the very highest level, that worries me extremely. The real message from that is that the model's just not working. The idea that your solvency is stronger in the event of the Eurozone breaking up or the American financial system collapsing just totally fails the common sense test. I'm just wondering how you guys respond to that kind of result, and I suppose the simple answer is, that's why you've got all your buffers and your cushions because you know everything's not perfect. Again, I'm wondering how you guys in practice are allowing for the fact that you're very good managers of this ratio. You're getting a lot of detailed questions, but frankly, when you've tested this ratio, when it matters, it completely fails the sense test.
No, thank you, William. That's a very good question. Of course, we realize that financial crises and sovereign crises aren't good things and aren't generally good for business. What we try to show is that with the regulatory framework that we have, that we operate under, that we can balance our risk exposures in a way that gives us some offsetting effects to manage it for stability. I think our job and what we aim for is to limit the surprises as much as we can.
Yeah.
That is also what we go for here. We have a very strong solvency ratio of 204 percentage points. We give you our sensitivities. We give you the tolerances we live within. We feel if we can operate in that framework, then somehow we are limiting the extent to which these kinds of events that we cannot predict will hit us. It is also true that the past crisis isn't the next crisis. Of course, we prepare also for the next crisis, which is why I had the hypothetical scenario there. We know that there are things that can break us.
On the other hand, I think, when we look at some of the things we are most exposed to, the spread widening of govies, for example, we do essentially feel that, well, if you're in the German or the Dutch or the French sovereign, and there is really a default issue coming there, that you're pretty far down the track. We think our primary risk there is really the default risk and not the spread risk, as I've said. What you saw in a lot of these crises is really a spread thing, which I think for us, given we're a very long-term business, isn't that severe. That's sort of what you're picking up in that framework. Thank you. Then you're in the middle, the lady. Thank you.
Claudia.
Claudia Gaspari from Barclays. Going back to the link between the free cash flow generation and the operating earnings. You have confirmed the guidance, you have referred to the past. It's also true that in the recent past, we have lived in a world where markets have been very supportive across asset classes. There's been no defaults, very low volatility, equity supportive. It's also true that both solvency duration and solvency operating capital generation can become quite procyclical. Can you give us a sense of how much the free cash flow generation can deviate from operating earnings in, say, the three stress scenarios that you present from a ratio perspective? Can you give us a sense of how big the difference can get?
I start, and you follow with the bit. When you look at the last seven quarters, and I don't remember the number of the slide, but it's the movement analysis of Solvency II since the time of the IPO. You're right. Markets help us, and we had approximately EUR 1 billion of capital being generated. This EUR 1 billion was compensated with approximately EUR 1 billion of other factors coming into the segment in the column other, including the assumption changes that we did, for example, in the acquisition of Delta Lloyd. That means that over that period of time, if you exclude markets, what you've got is EUR 2 billion of operating capital generation compared to approximately EUR 1.9 of free cash flow.
One caveat to make is that in the operating capital generation, we are not reflecting the approximately EUR 40 million of cost of the hybrid capital that is in the segment other. Very much in a period with a lot of volatility that has worked.
I think the thing to say is that there's a lot of complexity and a lot of volatility, and if you zoom into things, it always gets more complicated. At a simple level, we try to manage it for free cash flow and for remittances and to get that out. We always try to think, is what's happening something that's changing the path over the longer period there? Is it something that is just noise and we should just keep going? You have seen that we try to bring stability. I think in these scenarios, if we look at it, we would not necessarily have to change that remittance pattern a lot.
If you then see a scenario that is not here, that maybe you can dream up that is even more severe, at some point, you have to alter the course. What we are trying to show is that we are really quite stable given that we manage the business in that way.
All right. Thank you. I see a hand there, and then I'll get to you, Steven. JT.
Steven JT, yeah.
Hi. Thank you. I guess first, from all historical observation, it seems clear to us that in times of extreme market stress, corporate credit spreads increase.
I think from observation in times of stress, core sovereign bond spreads have always decreased. I think as investors, we very much appreciate being invested in a company whose regulatory capital tends to increase during times of stress, and recognize that that's not a function of you using a poor model. That's a statement, not a question. Two questions. First, in terms of the guidance for 5%-7% growth in net operating result, it seems to us that there are different elements going on here that would cause cash flows to grow at a rate faster than earnings. The first being, as you re-risk, if you were to sell a 2.5% yielding German Bund to buy a 2.5% Dutch mortgage, that's going to give you no incremental IFRS profit uplift, but will increase meaningfully your solvency capital generation.
Secondly, even if we assume no increase in interest rates, the UFR strain is going to decline over time.
First question is, are we right to be thinking about this as actual core cash flows and capital generation from a Solvency II framework are likely to be increasing at a rate faster than that 5%-7% over the intermediate term? Second question is on the bank. We have
Sorry, can we limit to those two questions? Because I've got a couple more people also on here.
One question.
Yeah.
Just one question.
Oh, I thought it was.
He's got one question.
Oh, okay.
Yeah. One is stating one question.
Oh, okay.
One question. Now the other question.
Sorry.
The second question is, when we look at NN Bank, we've expected meaningful cost synergies, because it's just a very scalable platform.
When we see the 10% cost reduction, are we right to understand that that's an absolute cost reduction in spite of significant continued growth in NN Bank, i.e., that the actual amount of cost cutting and synergy is much greater than 10%, but that that's offset by organic growth in NN Bank over the next several years? Thanks.
Thanks.
Thank you, JT. Maybe, although it was not a question, if I may, I'd like to comment on the statement because I fully concur. There is a choice in terms of deciding where you invest, and the reality is that because of our underweight on corporate bonds, we basically, at the moment, have moved to safety because of the heavy weight of AAA government bonds. Yes, indeed, that is how it works. It's also, I think, one element that Jan-Hendrik mentioned in his presentation, which is although when things are wrong, the market is nervous, equity markets decrease. This is the moment at which the spread on corporate bonds increases, and this is a very natural hedge in our solvency. That's something that is good for us. On the growth of 5%-7%, would the free cash flow be higher than that?
I think I would go to repeat a little bit myself. There are a few items that you have identified on the investment yield. Also, an important element is that this free cash flow, there is also a part of our own decision of when a company pays a dividend or doesn't pay a dividend. Free cash flow is defined as the remittances minus the holding cost. Obviously, the remittances are influenced by the evolution of the capital, but we've got a certain margin in order to this free cash flow to fluctuate around that range. Our best guidance would be not to go above the 5%-7%, but stay within the 5%-7%.
In terms of NN Bank, the 10% reduction in absolute terms of cost up to 2020 indeed would be after any additional inflation cost or investment into the growth of NN Bank.
Thank you. Steven had a question. I'll get to you, Bart Joris .
Hello. Steven Haywood from HSBC. Just a simple question, I hope. What is your preference, share buybacks or special dividends, and how do you think about them? What time of year do you prefer to announce these things? I'm thinking quarterly results or full year results or something like that. Thank you very much.
Thank you.
Thank you.
Thank you. Thank you, Steve. We do prefer to announce good things when it is raining. Not in a sunny day. In order to cheer people up. No. We will do that when we basically assess what is our risk profile telling us, analyzing our ORSA, our own risk solvency and self-assessment.
Yeah.
When we are basically looking and projecting what is the capital generation and the cash flows expected from the future, analyzing what opportunities exist.
Yeah.
No particular time. Your first question, share buybacks or special dividends. I think the share buybacks has worked very well. There was a certain element of a tax benefit. Some of the rules in relationship to the dividends might be changing. Not particular preference. We will look at it as it comes. The share buyback is more in a longer period of time to announce and execute. A special dividend, you just do it at once, to be decided on a case-by-case basis.
Thank you. Bart Joris. Yeah, you had a question?
Hi. Thank you for taking my question. Bart Joris, Degroof Petercam. If we look at the sensitivities on the Solvency II ratio, we see that they have declined since the end of 2016. You're also now managing on a certain tolerance level. Does that mean that your expectations or requirements on the Solvency II level of your Life business have changed, or in this case, have lowered? Second question on the medium-term growth. Should we see medium term as 2020 and then it ends because then your synergies have been taken, your cost programs have been fully completed, or should we look already beyond that?
Okay, he wants two questions.
I think the second question is probably for you, the first question for Jan-Hendrik.
I think the sensitivities are lower, especially the gov sensitivity. You will have seen we took some action there. I think we discussed earlier, we had a spread lock program to reduce that sensitivity a little bit. This is the first time we disclosed the tolerances. Of course, we always have somehow in our heads internally some limits or target tolerances that we work within. It's not a dramatic change. It's more that we have now gotten these in, I think, simplified them enough to be able to communicate them in an effective way. There is really no change in our expectation of the solvency level of any unit as a result from this change in sensitivities or the tolerances. You shouldn't read too much into it, I would say.
Okay, the second question on the medium-term guidance.
Yeah. Medium term is not 10 years, is not seven years, but is not intended as 2020. It's basically an over time guidance. Also, it does not apply for every specific year. Maybe just to note, I mentioned in my presentation that the 2017 base from which we start is been at a elevated level. On 2017, there has been, compared to 2016, a significant growth. I mentioned around EUR 90 million of private equity and non-recurrent items already happened for the first three quarters of the year. In any event, this is basically a guidance over time from the base of the 2017 level, which we have not completed yet, but therefore there is always some uncertainty. It is a medium-term guidance.
The Delta Lloyd quarter.
That's okay.
Thank you.
Yeah. Delta Lloyd has only been in 2017, reflected for two quarters so far and three quarters by the end of the year. That's the other aspect to adjust.
Correct. Kunal, you had a question.
Hi. Thanks for taking my question. Kunal Zaveri from J.P. Morgan. I just wanted to know, how do you define the excess capital? Will it be something to do with what the level of holding company cash is or a particular Solvency II ratio? If I remember correctly, you all had told that the Solvency ratio at 180%-185%, which was mentioned some months back, you all were pretty comfortable with that as well. Now at 204, it's significantly higher. Secondly, again on dividends, why is the guidance still the same at 40%-50%? Is it cognizant of the fact that in the future, if the payout ratio is at the moment lower, you all can do a buyback maybe sooner than later? Thank you.
Yeah. Thank you.
Yeah. Let me do that last one, Delfin takes the first one. We said a 40%-50% payout ratio. That's our payout ratio. Don't forget that we also have a commitment about excess cash that comes out over time. We're saying all that excess cash, that it goes back to shareholders in the most efficient form, unless there is a value-creating opportunity that we see. 40%-50% as a payout guidance for the sustainable, attractive ordinary dividends, and then the commitment to assess excess capital and bring that back to shareholders over time. Unless we can, of course, do a great, very attractive and value-creating acquisition or something else.
How do we define excess capital? It's even more philosophical question than the previous one. We have not determined a particular target range. As a consequence, it's difficult to relate it to that target range. I would come back to the guidance I have given in terms of the cash capital at holding being within that range, and how we look at our risk profile and the one in 20. That is what we take into account in a holistic view.
Thank you very much. Any final question before we break for lunch? There's a second round of questions from Farooq. Yeah.
Really sorry to delay everybody's lunch. Can I ask a question I asked before in a different way?
You want to squat
Dutch mortgages have been incredibly safe, obviously, and we know that, but it's subject to a model. I'm just wondering what does that model do in some of the scenarios you've talked about? What's your sensitivity to Dutch mortgage spread? It obviously has been volatile.
Yeah. Of course, we look at that. It's not one that we disclose separately at the moment. It is in our sensitivities. Do we still have the all sensitivity?
No.
No. I can get back to you. To be honest, how I think about this asset class. I think it's very important to take you through that a little bit. These are very secure assets. They originated as strong LTVs in the Netherlands, because I also showed up and said, "These LTVs are very different from the U.K.," for example. In the Netherlands, this debt stays with you for a long time. If you look at the historic losses on the portfolio, it's really very low. We're talking single-digit basis points for most of the years. We don't see big problems coming through there. It is secured on properties. The portfolio is relatively high quality. I would say that we have an appetite to increase. We're not yet at a limit for where our mortgage appetite lies.
When we look at risk return on any model, and you're right to flag that it's a model, these are still some of the best and safest assets on a risk-return basis we can get into. The sensitivities are, of course, affected a little bit by what the VOLA does in that scenario and other things. It's not a simplistic thing that we can just cover. In general, we see that this position is not one of the biggest things to worry about. These are safe, secure assets with good LTVs. The sensitivity is also not one that we disclose separately because it doesn't really make sense in the context of, for example, the government bond sensitivity and our overall ratio. Yeah.
All right. Thank you very much for all your interesting questions, and there were many. Thanks to the gentlemen on the stage answering them. I would now like to suggest that we break for lunch. We have just little under an hour now with a couple more questions than we had anticipated. The lunch is served again here in the lounge where we had the coffee break this morning. We will call you back in time. All right. Welcome back. Also for those following us on the webcast, please find back your seats. I hope you enjoyed the lunch. I also hope you had some time to talk to our senior management, who are all here. Can I please ask you to switch off your phones once again?
I would like to invite David onto the stage to talk to us about the Netherlands business. After David, there will be Leon and Michel on the non-life and the life businesses. Over to you, David.
Yeah. Thank you, Karin. Well, very good to see all of you either today or quite a few of you last night. I have three topics I would like to discuss. One is how have we been delivering so far on all of our results that we have committed to? Two is how does the integrated platform or the integrated company, what does it look like? The combination of Nationale-Nederlanden and Delta Lloyd, and what opportunities does that create on the back of our strategy around digital, personal, and relevant. Three, obviously, integration. How we're progressing with integration, how we're approaching it, and how do we get to the targets, which is, amongst others, the EUR 350 million of expense savings. Let's start. Let's first start with the progress since IPO.
For Netherlands Life, the target was broadly stable operating result, which were well on track. This is, of course, on the back of expense savings. We set a target of 10%-15% expense reductions for the Life company, and so far we have achieved 9%. Also, of course, the investment spread helped. Not only that, Life also showed strong growth in defined contribution. In the last 3 years, the gross written premium went up with around 50%. We have the introduction of the PPI, the DC pension vehicle that we have in the Netherlands. NN has over EUR 1 billion of assets now in this PPI vehicle. Good to note that also Delta Lloyd, via BeFrank, has over EUR 1 billion in assets.
In a relatively new market, it means that the market share in this PPI market will be above one-third for the combination of NN and Delta Lloyd. Overall, a strong performance of the Life company. For Non-Life, I know all of you, including myself, have the combined ratio on our mind for the Non-Life, or even more specifically for the property and casualty business. There were a couple more targets. First, on growth. The D&A business actually performed well and grew around 20% average growth for the individual and the group income. Also, Non-Life did well on the expenses. There was a target of 8%-12%. Target was set, and already Non-Life has delivered 7% year to date. Of course, the main topic for Non-Life is combined ratio.
We set a target of 97% or below, and clearly we're not on track here because year to date, we are at 103%. Let me just break that down for you. Despite a difficult quarter, the last quarter, we see that actually the D&A business is performing well, and we see a combined ratio in the range between 90%-95%, which is performing well. Also OHRA, the ABN AMRO joint venture, and ING are performing well. We see also their combined ratios that are in the low 90s. The real problem is property and casualty, and we see this both on the retail side and on the commercial side. If we compare to the market, we see that on the retail side, it is mostly an expense problem. If we compare to peers, we see that our expenses are too high.
On the commercial side, it is more of a claims problem. We have been seeing a lot of fire claims initially in the NN book, fire and weather related, and also recently now we've seen this in the Delta Lloyd book. Also on the motor side, the market has been seeing high combined ratios, and we are no exception to that. We had negative results on prior years coming through. We're taking a lot of action on this, and I will talk about that later. The bank. It already came up this morning. The bank has been performing well across the board. We set a target of 7% or more. The bank has clearly outperformed that target. Also, it has shown significant growth, both in savings and in mortgages, from around 19%, and the result is becoming quite material.
Year to date, the bank made EUR 92 million profit. Also, what is important for the bank is that not only the bank result itself, but the bank also generated around EUR 3 billion of mortgages for the insurance entities and NNIP, the investment partner fund. That's an additional added value of our bank. Expense reduction. We set a target of EUR 700 or later EUR 685, and as you probably have seen, we're well on track to deliver that. Last but not least, NPS, our Net Promoter Score.
This is probably the one that I'm personally most proud of because if you look at all the expense reductions that we had to do and all the regulatory change that we had to implement and everything we had to do in order to prepare for the integration and the ongoing efforts currently in integration, we've actually seen a very strong increase in Net Promoter Scores in the last year. That means that now every month we have more promoters in our company. We see every month actually more promoters coming in. That's something that is also testament on the strategy that we launched around digital, personal, relevant, and we clearly see now that this is paying off. That's probably more than enough about the past. Let's look at how the company now looks in the combined form of Delta Lloyd and Nationale-Nederlanden.
Let's start with the market positions. Clearly we have a market-leading position, and we're number one in pensions, both in DC and in defined benefit. We're the number one in individual life, very strong position in property and casualty, and also the number one in D&A. From a market perspective, we clearly have a leading position. If you look at our brand. The brand, the Nationale-Nederlanden brand, has the highest awareness in the Dutch market, as you can see on this graph. Personally, I'm mostly interested actually in the top part, the top orange part, which is the brand preference. What we see in the retail space, but especially in the SME space also, is that the NN has the highest brand preference in the Dutch market.
This is very important today, we are moving, as you know, more and more into the digital world, we see that actually this brand strength becomes even more important. Distribution. We're basically in all distribution channels. We're the number one in brokers. If you combine the two entities, we're the number one broker player. We're also the number one in mandated agents. Now we have, with the addition of OHRA, we also have one of the strongest direct brands. OHRA, for those of you that don't know the company, OHRA has been quite successful in selling property and casualty, so retail property and casualty, and healthcare, that is underwritten by CZ. It gives us a strong distribution brand on the direct side. Last but not least, our customer database.
We now have around 5 million customers, retail and SME in the combined company. This excludes actually all the customers that we have with either ING or ABN AMRO. This basically also means that if you think about 5 million in the context of the Netherlands, we should be able to practically touch every household in the Netherlands. This is something that over time we will need to capitalize on. This is of course the internal view. If you talk about customers, let's take a look at how this platform looks from a customer perspective. When we're talking about these 5 million customers, what propositions do we have? I think this combination, if you look at all the propositions that we have towards customers, this is unique in the Dutch market.
Let's start, for example, at the top with Nationale-Nederlanden, which is what we call where we have an omnichannel strategy. Omnichannel, as an example, means that, for example, if one of you is trying to do something on our portal for your car insurance and you get stuck, it means that either a chat function pops up or you decide to pick up the phone and you will go to your call center, and the call center can already immediately see what you have been doing and pick it up from there. If you want, it also means that your broker is informed about what's happening, and he can also play his role. This is the world within NN that we're working towards, and we're also bringing the Delta Lloyd customers on board. On the right top side, you see the banks.
There's clearly still a lot of customers that prefer doing their insurance business and pension business via a bank. Now we have with ING and ABN AMRO, we have the two leading banks in the Netherlands, where we have an exclusive agreement with to sell the life and non-life products via these two banks. Another example is BeFrank. BeFrank is the PPI I mentioned earlier, the DC vehicle in the Netherlands. It has been offering a lot of innovative service propositions. It has been successful in offering portals, not only to the employer but also to the employee, and has been attracting therefore also a different target group of customers than typically NN and Delta Lloyd have been doing together. The combination of all these propositions make us unique.
I think all of these companies also can stand on their own, it also means that on the back of digital personal relevant, we believe that we now have more customers, more data, we can share talent, we can build up capabilities, and we can further strengthen the overall platform. Let's look at the progress that we've made so far on digital personal and relevant, as we talked about in 2015. On the left-hand side, you see the four major streams that we have been working on in the past two years. Let me just give an example. On relevant customer contact and data analytics. What does this mean as an example?
It means that if one of you would go on our portal, and we recognize you, whether it's you're logged in or we recognize your IP address, we can completely then personalize the portal for you. That means that depending on your risk, depending on what you know, and your age, and other preferences, we can personalize the portal to make sure that the information that is on this portal is relevant for you. Of course, on top of that, it also enable us to move into a world where we can then also on an individual basis start better underwriting and pricing, because all the data we can also use then to get to more sophisticated pricing and eventually to calculating the individual risks of each of you and then try to price accordingly. Another example is distribution partnerships.
What we have been doing is in cooperation with our brokers, we develop propositions, or we develop next best actions that the brokers can actually use based on our data analytics and that they can offer then to their customers. What we've seen is actually we're getting better and better at this. We used to get around a six and a half, 6.7 score from brokers, and now it scores a 7.5. We see if we get that right, that it actually makes it very easy for a broker to do business based on the input that we give him. On the middle of the slide, you see some of the results. I already mentioned the NPS improvement that we have seen in the Dutch market.
For those of you that are not very familiar in the Dutch market, I can tell you, getting a positive NPS in a Dutch environment is really difficult. I don't want to criticize my own countrymen too much, it is really, really difficult. We've been getting to positive numbers. Also we've been seeing that we're stabilizing, actually increased it a bit in September. We're well on track to do this. I think another testament that we're proud of as part of the strategy is that we got the award for best mobile insurance company, meaning that the mobile services that we offer to our customers are rated number one in the Dutch market, which I think is also a testament of the progress that we're making on the digital side.
Clearly, adding Delta Lloyd strengthens the strategy because not only we get more customers, we get more skilled, we also get more capabilities, and we get some more innovative propositions that Delta Lloyd had already been working on that we can incorporate into our platform. Let's look at innovation. Lard already mentioned, we're doing a lot. If you look at the innovations over where we have Brickler, we're looking at the housing market, we're looking at blockchain, we're looking at clouds, we have experiments around email bots, around artificial intelligence. We're testing a lot, and we're failing, and we're starting again, and we're failing, we're still testing a lot in the innovation space. Let me give you one example that how this potentially works. We have here the Gappie on the slide.
Gappie is, I guess, Amsterdam slang for Gappertje, or as my daughter would say, BFF. Anyway, your good friend. If you borrow your friend's car, now obviously, if you damage it, the no claim of your friend will be impacted. You're not only damaging basically your friend's car, but now you've just damaged also your own relationship or your Gappie. With this app, you can now ensure actually the driving of your friend's car to make sure that if you hit something, then the no claim of your friend is not impacted. Of course, the question is: Is this now the new big business model that we expect for the Netherlands? Probably not. We're testing these concepts. Suppose that this concept works, and so far it seems to be working.
It gives us then the opportunity to, for example, incorporate it into our Nationale-Nederlanden offering, or to incorporate it in the OHRA product offering, or to offer it via ING or ABN AMRO as well. We're testing also this concept to see if we can then implement it in one of these many propositions that I was showing you earlier. All of this is still very much at the Netherlands level. I think the question is also, how do you translate this back to the business units that we are talking about? Let's start with Life. We are in pole position to win in DC. We are the biggest player already in DC. The DC market is rapidly developing. Big target, of course, for the Life company is winning DC.
We believe that with the asset management capabilities, our distribution capabilities, our brand, we should be able to continue the strong position that we have. Obviously, there will be synergy benefits, we believe, in the defined benefits books that we'll be putting together. As I was talking about earlier, we have a very large installed customer base. A customer base that also other business units should be able to benefit from. On to Non-Life. As I was saying, the big challenge, of course, for Non-Life is the property and casualty business and the lack of improvement we've actually seen on the combined ratio. I think the big question, and Leon will talk about all the measures that we're taking. I will mention some, but Leon will go into more detail.
I think the big question is now, why would we or why would you now believe that we will be able to bring this combined ratio further down? We've been saying this for a while, and you guys, and I see some recognition over there. Why would you believe this? Well, let me just. Of course, I thought about this because I didn't get in this position by not delivering on promises, I can tell you that. I've been thinking about this. Why would this now work in the coming period? There's a couple of reasons. If you start at 103, where we are today, I think a significant improvement of the combined ratio will come out of expenses.
If you translate back the EUR 100 million of expense savings that we are planning on doing, you'll see that a significant part will come out of expense savings. I already mentioned, this is especially important also on the retail side, where we are too expensive versus the market. Expense savings is something that we control ourselves. Two, market dynamics have changed. What we have seen is that last year, the combined ratio in motor was around 114% in the Dutch market. Fire was 109%. What essentially is also happening is there's room for increasing premiums without immediately running the risk of driving out your good risks because the whole market, basically, whether it's fire or motor, has been suffering from higher combined ratios. Another piece is the fire portfolio.
As you have seen, we've had certainly also within NN, we had periods where we had higher fire claims, whether it was fire or weather-related. As we talked about before, we put a task force on it, and there will always be a certain amount of volatility in fire. What we're seeing, for example, this year is that year to date, the NN book is on 93% for fire. Delta Lloyd, however, now we've seen comparable issues where we see high claims on the Delta Lloyd SME book. We're now implementing a task force to see what prevention and other measures we can take to also improve the Delta Lloyd book. It gives a certain amount of confidence that we've done it before because the NN portfolio is looking better now. Then last but not least, motor.
Motor has been consistently a challenge in the Dutch market and also for us. We've been suffering also from prior year claims. You know that in Q2, this was also the reason that we strengthened our reserving for motor and liability with EUR 40 million. This was to deal with the prior year claims, and in the meantime, we have been repricing and readjusting our risk to see that also the current book will perform better. What we see year to date since the reserve strengthening is that the portfolio is behaving in line with the assumptions we've taken on the strengthening of the reserving. All of these measures together, also with a different mix of businesses, because we now have also ABN AMRO in here, we have OHRA in here.
With a different mix of businesses, we believe that over time, we can bring the combined ratio to 97 or below. I hope it helps. The bank. With the bank, the plan is to rapidly integrate Delta Lloyd Bank and NN Bank. We're optimistic that already January 1, subject to regulatory approval, but that January 1, we can already announce the legal merger of Delta Lloyd Bank and NN Bank. Clearly, because of the scale, we should be able to bring down the cost-income ratio, as already came up this morning. The banks have a comparable business model. The cost-income ratio, we should be able to bring down while continuing to grow in mortgages. Of course, the growth in mortgages will also depend on how spreads are evolving in the Dutch market. What is another important target for NN Bank is customers.
Almost half of the new customers that come into Nationale-Nederlanden today actually come from NN Bank. Over two-thirds of all traffic that we see on our portal and our app is because of NN Bank. NN Bank is also for us an important vehicle to bring in new young customers, but also to increase traffic that the other business units then can also benefit from. As already came up this morning, we now believe that the bank can self-fund its growth, depending on how this growth will evolve, especially in how the mortgage market will develop. We believe that it not only can self-fund its growth, but over time, it will start paying dividends. The overall target, of course, is to continue to have an ROE above 10%. I realize that I already shared a lot, maybe a quick summary in between.
We have delivered on our commitments, but we clearly have work to do on the property and casualty side. The combination of NN and Delta Lloyd makes us a very strong player in the Dutch market with strong propositions on the back of 5 million customers and a very strong brand. We've set very clear targets also for our business units, all of that in order to further drive our strategy around digital, personal, and relevant. That's the plan for the coming years. That of course leaves one big question, which is around integration. Let me just go to integration. In April, when we started the integration, we set some very clear principles from the beginning, and those are the principles that we have been following. I think it's good to maybe share a few of those.
First of all, we said the NN model, the NN operating model is leading unless. It basically meant, for us that the head office would be in The Hague. There was clarity around the management board, but also the products and services and systems of NN were leading, unless there was a very strong case where you want to deviate because there was a unique either platform or proposition of Delta Lloyd. I can tell you this created a lot of clarity and speed from the beginning. Another principle was quick decision-making. Lard already talked about the speed at which we did the transactions, but also, on day one, we appointed executive management. Dorthe, for those of you who were there, already talked to you about that. Within the three months after that, we appointed another 155 of our managers of the combined entities.
We're optimistic that in the beginning of 2018, we will have the legal merger of NN Bank, of NN IP. We took a lot of quick decisions on stopping projects. We've seen also significant benefits from stopping projects and combining procurement spend, leading already to the first savings that were shown. Clearly quick decision-making has been helping already to get going on getting to our expense savings. Another principle was best manager for the job. We went through extensive selection process assessments and multiple meetings and loads of cups of coffee in order to get to figure out what is the best person for the job. I'm very happy also that if you look at the business units now, we see a very good mix of NN and Delta Lloyd people in the business units.
Which I think is great because that way it will help also going forward in building on the combined strength of both companies. This new management has already, since the beginning of the year, till the end of Q3, also managed to reduce the FTE count with 750. Already we are managing the company with 750 people less, and of course, over time, we will see how that will evolve, but it does come back into the cost savings. Another very important principle was commercial momentum. I think one of the big risks in integration is that all the energy and focus goes internally because people are involved in their own job, or they were in integration and system and platforms, and all the focus goes internally. With my management team, we really committed to, we're going to be outside, we're going to be visible.
We ended up meeting most of our corporate clients. We met over 500 brokers in smaller sessions where we talked to them on what do we believe, what will the company look like? How can we work together? What threats do they see? What opportunities do brokers see in the cooperation with us going forward? We're very closely monitoring all the broker progress that we're making. Not only for the combined entity, what is the business that we're doing, but we can also track what proposals do we have, what is outstanding, what is working. We also track the NPS very closely from customers to see how customers are reacting to all the changes. The conclusion is very simple. The commercial momentum is very strong, and we see this in the pension business. We see it in the non-life business.
The commercial momentum currently is very strong. To be fair, we're really in the beginning of integration and there's a lot to be done, but so far we have good progress on the commercial side. In summary, we have some very clear integration principles, and we're sticking to this, and I think so far we are progressing well. Of course, then there's what are the next steps? For 2018, we have a couple of milestones here. I can tell you we have, of course, very detailed plans. There's a lot more milestones, but we picked some of the more visible ones. One for 2018 is that we will rebrand the Delta Lloyd products to NN.
Already this year, 1.4 million customers are getting a letter about this, and are being informed by us about the change in the brand, and that they will become part of Nationale-Nederlanden. We will move all customers into one database where our customer analytics team can work on. As I mentioned earlier, we were planning legal mergers, with the bank, with asset management, with Belgium already for 2018, and we intend to finish the head office integration, in 2018. For 2019 and onwards, of course, there's more back-end work also to be done. The integration and legal merger for the life and non-life company is planned for 2019. Further upgrades that we can do in our systems, further rationalizing our systems.
We actually see that probably the savings, also for the life company and the non-life company, some of it is early, but some of it is also later on, and we also see opportunities later on to continue to save. Decommission the Delta Lloyd infrastructure. Not only decommission it, but in combination with NN, move this infrastructure to cloud. Of course, for the company, very important as of 2019, a new collective labor agreement for the combined entity. Many milestones that we have coming. When we're doing this, obviously, the plan is that we really want to build the leading company in the Netherlands, and we not only want to build it by leading in terms of size, but also in terms of quality and best customer service. Part of that is also that we need to be able to be very competitive towards our customers.
This is also how we got to the target of EUR 350 million of savings that we're planning on doing in the integration scope. Let me talk about the EUR 350, because it is obviously a big number. If you take a step back, what we have done is every function in NN, whether it's finance or risk or HR, and all the business units involved in scope, have delivered very detailed plans. We went through many rounds of iterations on challenge, go back and forth, and challenging on these plans. All of those combined plans lead us to believe that we can do the EUR 350 million.
William, I remember last night you were saying, "Yeah, yeah, all these companies that do it, and I never see the EUR 350 million back in the numbers." Here the real plan is that you're going to see the EUR 350. You should be seeing end of 2016 to end of 2020, you should see it in the expense line of the integration scope. We try to group the savings into four pockets. One is clearly synergy. There's overlap in terms of branding. I already mentioned that on the digital front end, we're putting together a head office staff, a support function. There is clearly a synergy piece which is contributing to the EUR 350 million. Another piece is simplify.
We have quite complex landscapes in both companies. This creates an opportunity to not only simplify within the NN or Delta Lloyd scope, but to simplify also across these two companies and move it to cloud. A third one, not necessarily related to integration, is variabilizing expenses. We're going more and more, and I'm sure you've heard about these platforms as a service, where we're going more and more where we can variabilize our unit cost. This also helps then in case portfolios are running off or are increasing, that we don't get stuck with the fixed costs. The individual life company has already taken steps in this area, and there's more planned here. The last one, of course, is digital. Digital helps, of course, to create more customer satisfaction.
On the back of that, because of all the digital interactions, it also is a big enabler for savings that we see in the company. That's the overall pockets where we see the savings coming from. Of course, it's also good to look at how does this break down for the Dutch units. For Netherlands Life, you've already seen, we commit to a broadly stable operating result and around a 20% cost reduction that we see from the end of 2016 to the end of 2020, with significant remittances. Michel will later on talk in more detail on the life company. Non-life, combined ratio of 97 or below, also around a 20% cost savings and remittances broadly in line with the operating result. Leon will later on talk about this. The bank.
For the bank, we aim for at least a 10% cost saving on the combined entity, of course, a rapid integration of the bank. The bank team has done this before. For those of you who remember, we had WestlandUtrecht Hypotheekbank, which was a mortgage bank from ING that came out of ING and came to NN. We have already merged WUH with the NN Bank. This team has done the integration before, therefore now also we expect that we can do the integration of the Delta Lloyd Bank and the NN Bank. We aim for an ROE above 10%. As you probably know, we have a good book of mortgages with good spreads on it. That book is also will be reset over time, so will have a downward pressure on margins.
Mortgages in general, there is some pressure on the margins that we see. At the same time, because of the scale that we have and the cost-income ratio that we're driving down, that we believe that we can keep the ROE above 10% for NN Bank. Of course, important that the bank can now self-fund its growth going forward. We expect over time the bank also to start contributing to dividends. That brings me to the end of my presentation. Going back to key messages. One is we really want to leverage on our leading position in the Netherlands. Our strategy around digital, personal, and relevant will be supporting that, because it also enables us then to drive and improve our operating result and our cash generation. Last but not least, we are delivering on the integration plans.
We're well on track to deliver, of course, we have still a strong target to deliver on for EUR 350 million of savings by the end of 2020, we're well on track to deliver that. That I will leave it for now. I will be back for Q&A, which I'm sure you will have. Now let me give the floor to Leon van Riet, who will talk about our non-life business in the Netherlands. Thank you.
Thank you, David. Good afternoon, everyone, and welcome. Thank you all for being here. Many of you I've seen in a Delta Lloyd setting before. My name is Leon van Riet, and I'm the CEO of Netherlands Non-Life. I was appointed in this role in April this year, immediately after completion of the Delta Lloyd acquisition. Before that, I've been working for 18 years at Delta Lloyd, in that period, I worked for eight years as head of IT of Delta Lloyd Group. I worked for six years as CEO of Delta Lloyd Life before becoming one of the executive board members responsible for Life and IT. My presentation today I will start with an introduction of the Non-Life company and its strong footprint in the Netherlands. Secondly, I would like to lay out our plans for the integration of Delta Lloyd Non-Life.
In the third part of my presentation, I will walk through our plans for structural improvement of our P&C business. Let's dive in and start this introduction of the Non-Life company. With the acquisition of Delta Lloyd, we created a market-leading company in the Netherlands that is active in all segments and in all distribution channels. We are the market leader in the D&A, the disability and Accident markets, both in group and individual D&A. We are now number 2 player in the P&C market, we have a multi-label distribution of health insurances via our partner CZ, which is one of the top 3 health insurance companies in the Netherlands. As David mentioned earlier, we offer many innovative solutions in the P&C business via our innovation lab called Sparklab and via Aura. You can see, we are a well-positioned company with many strengths.
We also recognize that a step change is needed to improve our combined ratio, especially in the P&C business. We have detailed plans to reduce costs and further develop our underwriting skills, I'm confident that we will achieve the target combined ratio of 97% or below. Let's look more in detail to our market position. Following the acquisition of Delta Lloyd, Netherlands Non-Life has doubled its market share to 23%, with a gross written premium of around EUR 3 billion. Together, the combined business is number 1 in the D&A market with a market share of around 28%. We are well-positioned as number 2 in the P&C market with a market share of 22%. In total, we serve 3.5 million customers, which makes us relevant in many households as well as with SMEs and the large corporates.
We continue to improve our positive Net Promoter Score with intensive programs focused on optimizing customer service. We also have all of the field award-winning products, for example, on the legal protection product for NN Retail. In the highly competitive Non-Life market, scale is important. Our significant scale offers the potential to reduce our overall expense base, for example, by rationalizing IT systems and deduplicate our organization. It also provides a strong position to deliver on cross-sell ambitions and an improved customer experience. On the next slide, I will give you more detailed information on our broad presence in the market. As you can see, our strong market position is well-balanced and also well-diversified, both in terms of product offering as well as via our distribution reach. The largest part of our portfolio is P&C business, with the most significant product lines being fire and motor.
About one-third of our business consists of D&A business. Our distribution is also well-diversified. The majority, almost 50% of our distribution, is via brokers. Around 26% is distributed via mandated brokers. 14% of our distribution is via bank channels, and the remaining 8% is direct distribution of insurances. We have highly recognized brands. Our main brand, NN, is used for omni-channel distribution. The Movir brand is used for individual disability and is highly rewarded. I'm proud to mention that Movir, the Movir organization, has been selected as the best D&A company in the Netherlands for seven years in a row. The Aura brand is used for direct sales of P&C and health insurances. For the bank channel, we have access to two strong brands, ING and ABN AMRO. To conclude my introduction, the Non-Life company has an excellent starting position and is capable to respond to all market dynamics.
Now let me take you to the second topic of my presentation, the integration of Delta Lloyd. In September, we finalized the integration plan, and we are currently making good progress with the implementation. As I mentioned before, both NN and Delta Lloyd have roughly the same size and have an overlap in products and distribution channels. However, we have a different setup in terms of organization, systems, and solutions. Integrating these two companies comes with a challenge, but on the other side, also offers the opportunity to combine best of both worlds. For successful integration, we defined four levers. The first lever is around people. To make the integration successful, we want to maintain and combine the unique skill set and expertise of our people of both Non-Life companies. We safeguarded this with the appointment of a balanced management team with members from both NN and Delta Lloyd.
We have an intensive engagement program to maintain our key people. In terms of our product suite, we have made clear choices based on market position and customer satisfaction. For the majority of our business lines, we have chosen for the NN product suite. However, we want to leverage on best practices, so in certain areas, we will extend the NN products with features of Delta Lloyd products. A good example is the Delta Lloyd agriculture product, which is added to the NN SME P&C product. The third lever for successful integration is around systems. Also with regard to IT system setup, we have made clear choices of our IT systems to be in line with our product lines. We have mainly chosen for the NN systems, and as a result, we will simplify our IT landscape from currently 44 to 19 systems within the next three years.
This will not only help to reduce expenses, but will also make us more agile and reduce the time to market. Our challenge for distribution is also to maintain, and where possible, extend our broker business while continuously improving our customer satisfaction. During the summer, we organized 15 broker sessions to inform our top 1,000 brokers about the integration plans we have for Delta Lloyd and to collect their feedback. I personally also attend the majority of these 15 broker sessions, and the feedback was highly appreciated. As a result of that, we continue organizing these sessions with the brokers. Most important of all, we haven't lost any broker business due to the acquisition of Delta Lloyd. Around customer satisfaction. Despite we are going through a complex process of integrating, we also continue to improve our digital footprint and our customer service.
Since the Delta Lloyd acquisition, our customer satisfaction is increasing. Moving to slide seven. We have set ourselves a number of important milestones for the integration. Looking back at what we already have achieved in 2017, first of all, we appointed a new management team immediately after the acquisition, and this provided clarity to the Non-Life organization. Secondly, we have set up a detailed roadmap for improvement of our performance in the P&C business. We have started the implementation of this roadmap, and I will take you through in more detail later on in my presentation. Thirdly, we used the start of the new Non-Life organization as an ideal opportunity to also introduce a new agile way of working, which we have done. For 2018, we aim to achieve a number of milestones.
First of all new business will be NN labeled and will run on a single IT platform per business line. Secondly, the second target for next year is the health product offering. The Delta Lloyd health product will be rebranded to NN Health, and in parallel, we will continue with the OHRA health product. All of this will be done in close cooperation with our partner, CZ. We will launch the first NN Health campaign in the last quarter of next year. Furthermore, we expect the migration of the Delta Lloyd individual disability portfolio to be finalized by the end of next year. For 2019, we also have a couple of important milestones. The integration will continue, and we expect to finalize the integration of two important business lines, P&C Retail and Group D&A.
The legal merger of the two companies will be completed in the beginning of 2019. We aim to complete the integration in 2020 with the integration of our largest and most important business line, P&C SME, and with the simplification of our IT landscape, resulting in a reduction of 25 IT systems. Let me move on to our plans to improve the performance of our P&C business, the third part of my presentation. On this slide, we have split our business lines based on their relative size of gross written premium and the average combined ratio over the past four years. As you can see, about half of our business is performing well. The disability and excellent business has been running at good combined ratios of approximately 90%-95% over the past four years.
The franchises ING, OHRA, and ABN AMRO Insurance are performing well with combined ratios of around 95% over the past few years. Our P&C business, on the other hand, in particular fire and motor, both within SME and retail, have showed too high combined ratios. The reason for this is a combination of a too high cost base, limited investments in data and underwriting capabilities, and a slow response to changes in the market. To address this, we have developed a solid roadmap to improve the P&C results, I will take you through in detail in a couple of slides. First, let me turn to our D&A business on the next slide. As I mentioned on the previous slide, our D&A business has been running at a good historical combined ratio.
We saw some higher inflows of disability and lower levels of reintegration in the third quarter of this year. On average, the business of D&A has performed around 2 percent points better than market average in the last 4 years. This performance has been supported by the transfer of the NN individual disability book to Movir, By combining these 2 books, we reduced our cost base and we optimized our customer service. We also further optimized the reintegration process, which is vital for the D&A business. We see some opportunities to further improve our D&A organization by rationalizing IT systems and removing overlap as we integrate the NN and Delta Lloyd business.
We also see growth opportunities, in particular in the large corporate segment, through service-oriented propositions via digital platforms, as well as in the self-employed market, where we have plans to launch a new individual disability product in the course of next year. Let's go for the strong franchises of OHRA, ABN AMRO, and ING Insurance on the next slide. First, I would like to illustrate OHRA. The sole position of OHRA is based on a strong online proposition, a low-cost operation, highly rewarded products, for the direct business, and also its customer service is well-regarded. This unique combination has been driving the success of OHRA, we will continue doing so. The second franchise is ABN AMRO Insurance.
This franchise is a joint venture with ABN AMRO Bank, its success is based on a close cooperation with the bank, a strong brand name, and a wide range of award-winning products. We also see clear growth opportunities with the expansion of ABN AMRO Insurance in the direct and online channels via ABN AMRO Bank. The third franchise, ING Insurance. We have had a successful partnership with ING for more than 25 years, offering insurance products in both Belgium and the Netherlands. In these 25 years, we have built a solid and healthy portfolio. ING is the largest bank in the Netherlands, with a strong innovative digital footprint and a large customer base, we will leverage on this. Let's move to the next slide. As I presented before, a step change is needed to improve our performance in the P&C business.
Historical underperformance of the P&C business has been caused mainly by high combined ratios in our motor and fire portfolio. Within SME, performance has been lagging behind due to high claim ratios, as David mentioned before. Whereas in retail, we have seen expense ratios being too high. This performance is consistent with the overall Dutch market, which has been running at combined ratios of around 109% for motor for the past couple of years. Currently, we do see market dynamics changing as a result of consolidation of insurance companies, which will allow us to adjust premium levels and to implement other measures. In the past few years, we have implemented a range of measures. For example, we increased our motor liability premiums by 15%-20% since 2015, and we have been rationalizing some of our business, for example, the large car fleet portfolio.
These measures are now starting to show results. Our third quarter combined ratio for P&C this year was around 101%, which is the lowest level since the end of 2015. Now I would like to dive deeper into two actions taken across the Delta Lloyd and NN portfolio, which provides proof points of the actions we are currently taking. The first example is the outsourcing of the Delta Lloyd P&C retail portfolio, which has resulted in an improvement of our combined ratio with 21% points only in nine months because the outsourcing started 1st of January this year. This improvement is driven by a combination of cost reduction in underwriting operations and IT on one side, and on the other side, it is driven by improvement of our claims handling and by implementing premium measures.
The second example, which David mentioned earlier, on this slide is the turnaround of the NN SME fire portfolio. A range of measures delivered a 15% points improvement on the combined ratio since 2015. Here, we also took a range of measures, including strengthening of our underwriting criteria, daily monitoring, and a focus on inspections. Although the results of these actions are starting to kick in, more is needed to structurally improve the P&C combined ratio, for which we have identified a range of tangible actions as you can see on the next slide. The last period, we have set up a roadmap for improvement of our P&C business. In this roadmap, we continue with the measures I presented before and which are currently being successful, and we have added additional types of measures. We also have accelerated the speed of implementation.
As a result, we are currently implementing more than 100 improvement actions in order to improve the performance of our P&C business. Many of these actions are being implemented before the end of the first quarter of next year, and we are monitoring closely the progress of these measures individually. The measures include premium adjustments, underwriting improvement, and portfolio optimization across all businesses, fire, motor, and other, as you can see on this slide. Let me give you some examples. First, we've decided to rationalize structurally underperforming portfolios such as the Delta Lloyd Garage portfolio and the Delta Lloyd Construction All Risk portfolio. With NN, we stopped with the professional liability portfolio for accountants, notaries, and lawyers. We also have set up several task forces, for example, the Task Force Fire, where the best practice of NN is also implemented within the Delta Lloyd Fire portfolio.
This task force is implementing stricter underwriting criteria for our Delta Lloyd Fire portfolio in order to improve results. The IT solutions that we are implementing will reduce, of course, our cost ratio. What is also important that we are able, at the same time, to adapt our pricing in a more granular way, which is important for non-life business, and we will shorten our time to market, and makes us possible to respond quicker on market changes. We are also in the process of strengthening and centralizing underwriting oversights which will also improve our data analytics capabilities. These actions are being implemented now, but will take about 12-24 months to be fully reflected in our results. In addition, we will be reducing our expenses, which I will cover on slide 14.
Our target is an overall expense reduction of approximately 20% from the 2016 expense base to be achieved by 2020. We aim to achieve this expense reduction by removing the duplication in the organization and the activities following the acquisition of Delta Lloyd. We will simplify our IT landscape by phasing out 25 systems within the next three years. The remaining IT systems will have a higher level of online straight-through processing, which is also driving cost reduction. We will optimize our processes and standardize our products. At the same time, we will continue investing in innovation and underwriting. Now, moving to the next slide. To conclude around our roadmap for improvement. Our three-year roadmap for improvement forms an important direction for our non-life business and non-life organization.
It will result in an expense reduction of 20% by 2020, a healthy insurance portfolio, which is vital for a non-life company, improvement of our underwriting capabilities, which is also core of the business, and the simplification of our IT infrastructure by 60%. As a result, we deliver on a target combined ratio for non-life of 97% or below. Given the roadmap and given the qualities within NN Non-Life and our strong footprint, I'm confident it's feasible. Now, moving to my last slide. To summarize, the three key takeaways are, first, as market leader, we are able to leverage our strong footprint. Secondly, we have a solid plan for integration of Delta Lloyd's non-life, resulting in a simpler, more agile, efficient organization, resulting in a cost reduction of 20%. Last but not least, we have a clear roadmap to bring the combined ratio back to 97% or below.
Thank you for your attention, I would like to hand over to my colleague, Michel van Elk.
Thank you very much, Leon. Good afternoon, ladies and gentlemen. My name is Michel van Elk, and I am the CEO of the Netherlands Life business. I've been in this position since 2013. The Netherlands Life business comprises NN Life, Delta Lloyd Life, AZL, the pension administrator, as well as BeFrank, the PPI of Delta Lloyd. If you look at this combination, we are the number one life and pension insurer in the Netherlands, a position we are proud of. In my presentation today, I would like to take you through how we manage our business for sustainable cash generation and how we capture the growth opportunity in the Dutch pension market. If you look at the combined operation, you can see that we have the largest in-force client base, both in pensions as well as in individual life.
We have technical reserves of over EUR 114 billion, and this gives us significant scale, and this is essential for our business. It makes us very well-positioned for the challenges and the opportunities which the life and pension market offers to us. The run-off of the closed books, they will provide us with significant cash generation going forward, and it allows us to capture the growth opportunities in a changing Dutch pension market, and it helps us to accommodate our clients with their shifts from DB to capital-light DC. We have a very solid financial position with a Solvency II ratio of 218% for NN Life and Delta Lloyd Life at 149% at the end of the third quarter.
This, together with our strong capital generation, has enabled us to be a significant contributor of remittances to NN Group, upstreaming a total of EUR 2.2 billion since the IPO and paying a regular dividend since early 2015. If you look back at the time of the IPO, I think we can state that Netherlands Life has delivered on all its targets. We kept our operating results broadly stable over the 2013 level, which was just over EUR 700 million, with 2015 being on the high end because of significant private equity dividends. We've also gradually, but consistently, reduced our expenses in a structural way, we have reduced the risk profile of our book via shifting old guaranteed pension products to better hedgeable alternatives and move customers to DC. We've also been gradually moving our separate accounts to the general account.
We continue to see the same trends for the combined businesses, with pressure on the margins from the run-off of the books on the one hand, which is being offset by ongoing expense reductions, optimizing risk return within the books, and growth in DC pensions. Looking forward, it therefore remains our target to keep the operating result before tax broadly stable over the medium term. Now, let's have a look at our combined market position. Following the acquisition of Delta Lloyd, the already sizable position of NN, the orange part, has expanded to very significant market shares in group pension, the PPI market, PPI being the Premium Pension Institution, which is an individual DC vehicle, as well as in the individual life market. We have the largest market share in each of these three segments. On this slide, you also see the APF market.
The APF is a new accumulation vehicle which acts as a general pension fund. The APF market is very new. It's still developing. It's a market only partly aimed at traditional insurance clients, but its main focus is on company pension funds. With the total assets under management of approximately EUR 200 million, our APF, De Nationale, achieved a 10% market share at the end of the third quarter. If you look at the number of signed contracts up to date, we expect that our APF will be around the EUR 1 billion mark at the start of the new year. It's important to note that the growth of our APF did not come at the expense of the existing portfolio of NN Life. Our combined life companies service over 5 million customers via 813 intermediaries, through which we cover 77% of the Dutch broker landscape.
Probably more importantly, we do business with 99% of the top 250 advisors in the Netherlands. We offer our pension services to over 17,000 employers. I think it's important to note that we are not only the number one in group and pension and PPI measured by market size, but that we also excel in customer service. This is demonstrated by the fact that Delta Lloyd this year, again, was elected the most favorite pension provider by the intermediary channel already for the fifth year in a row. The combined force makes us the market leader in the Dutch group pension market, this makes us very well-positioned to capture opportunities in a changing pension environment. The group pension market is undergoing significant changes and has been shifted from DB to capital-light DC. Why is DC an attractive business?
The business is capital light, particularly in the accumulation phase, in which it's mainly a fee business on assets with insurance riders. In the payout phase after the pension date, it involves mainly immediate annuities, and this gives earnings potential on the investment margin. It also includes fees and insurance elements, but given the shorter duration of the guarantees, it comes with significantly lower mortality risks as classical DB. In the past 2 years, the contribution of DC premiums in our book in the new business mix for regular premium has increased from 18% to 50% for NN Life and even 75% for Delta Lloyd Life. This increase demonstrates the tremendous acceleration of the shift to DC, a market segment we are very well-positioned in through our strong brands and our strong product suite.
However, if you look back at the past service liabilities in the defined benefit pension book, these will not, or only in a very limited way, convert to DC. It will be the coming service in DC, the past liabilities will stay in DB. This leads to a DB pension book that over time will be more or less closed. In such a book, it's essential to drive economies of scale, through our increased scale following the Delta Lloyd acquisition, we are much better placed to drive expenses down. In the Netherlands, we're in the midst of a discussion on the future pension reform, it is expected that such a reform will shift more responsibility towards the individual.
The outcome of these discussions will take place over the coming years, but if it comes through, we are very well-positioned, capitalizing on our already leading position in the individual DC market. In conclusion, the combination of NN and Delta Lloyd gives us strong opportunities to drive value and generate cash. We will do so through expense reductions, optimizing the balance sheets, release capital from our closed books, and attracting new business in the shifting pension market. Let's have a closer look at the pension market. As highlighted already, we have a dominant position in this changing market. The Dutch pension system is changing, and reform is expected in the near future. The total pension market in the Netherlands covers EUR 1.4 trillion in assets and over EUR 32 billion in recurring premium.
It's important to note that although only part of this market is accessible for the life company and BeFrank, our PPI, NN Group in the Netherlands offers products and services across the entire spectrum. The gray segment represents the mandatory industry-wide pension funds, and as long as they are still mandatory, the life company cannot service or offer their services to the participants of these funds. However, NN IP, our asset manager, and AZL, our pension administrator, offer their services also to these pension funds. The life company and BeFrank serves the remainder of the market, in which we see the significant shift from DB to DC and shifting more responsibility towards the individual. In the future, this can provide opportunities for other products and services aimed at both employers as well as employees.
We are very well-positioned as we have a strong brand, economies of scale already, a large installed client base, the capabilities to serve both individuals as well as employers, pension and investment management knowledge under one roof, and a strong position in the intermediary landscape, as I highlighted to you. Let's now move to the integration. I mentioned the value drivers which we have as a life company. However, in order to maximize these value drivers, we need to integrate and improve our businesses, and we've set ourselves a number of objectives. Since the completion of the transaction, we've already reached a number of these milestones in the integration. The management teams of the life companies have been integrated, and we now steer the companies as one.
The business has already been reorganized in closed books for pension and individual life, on the one hand, and we've created a new pension business line in order to create focus. We've also already aligned the key mortality and other assumptions of NN Life and Delta Lloyd in the second quarter, and consequently strengthened the capital position of Delta Lloyd Life. As David already flagged, we've worked intensively on our integration plans, and we're now steadily moving or continuing our move in the execution phase to deliver on the targets we've set. We're full in the work to move Delta Lloyd Life to the partial internal model, which we expect to be completed by 2018, followed by the legal merger of NN Life and Delta Lloyd Life expected in 2019. The realization of these important milestones, of course, are subject to regulatory approval.
They will further give us efficiencies in the way we can manage the balance sheet. If you look at the commercial side since the acquisition, we entered into a dialog with the intermediaries. Leon already hinted at it. I personally spoke to over 120 of the top intermediaries in the Dutch market, taking on board their feedback, such as, for example, to safeguard the best practice of Delta Lloyd. It's a strong desire of the intermediary channel because also for the sixth year in a row, we would like to be the most favored company by the intermediaries. These discussions have been providing excellent input for our plans in combining products and services, particularly for pension new business. We all know system migrations in a life company are tedious, and it's difficult to get it right. But we need to get it right.
As we are moving along, we need to find a good balance between maintaining and improving our current service levels on the one hand, defending our strong market position on the same hand, and the speed of the integration on the other, particularly on the pension new business side. As you can see on the slide, we will be migrating several systems and platforms over the next three years. The individual life team already is firmly in the execution phase of this. The first three out of 10 systems we want to have shut down in 2018 already, followed by another three systems in 2019. We expect eight out of the 10 planned migrations to be completed in 2020. The next slide will give you a little bit more color on our expense reduction.
Both NN Group and Delta Lloyd have been successfully reducing expenses over the past years and have been progressing on their standalone cost reduction programs. Combining the two companies will provide additional scale, which will help us to continue this trend and manage the unit cost in line with the declining portfolios for a prolonged period of time. In the next three years, we aim to reduce our expenses further by approximately 20% from the 2016 combined expense base through a number of areas and initiatives. First, we will remove all duplication of functions and activities within the two life companies, as well as at a central level, which will lead to lower cost allocations to life over time. As I also already mentioned, we will rationalize and migrate IT platforms and insurance administration systems, and we will continue our efficiencies as we were already doing in our standalone plans.
Amongst others from lower project spend, expanding the use of robotics. We now have 10 robots live in the NN Group legacy environment, but also increasing our straight-through processing in the target system environments. Within these targets of expense reduction and what we know today, we expect that we will be able to absorb upward pressures from inflation and regulatory changes. Combining these businesses give us great opportunities. Integrating two substantial life companies is not an easy thing to do, and it does come with its challenges. We need to integrate two large workforces in which we want to keep the best of both worlds. We need to combine the rigor and thoroughness of NN Group with the entrepreneurship and the agile way of working of Delta Lloyd, and we also need to foster the outside-in approach of Delta Lloyd.
We're also dealing with a workforce which is structurally declining over time. In order to keep staff morale high, we have created a clear vision which our people can rally behind. We are the largest, our vision is we want to be the best. We want to be the best life and pension insurer for our policyholders, employers, as well as for the intermediaries. By doing so, we will maintain our number one position in the Dutch market and at the same time, be a great place to work. We have many customers, already mentioned that a lot of times to you. That brings me to my second challenge. We need to take our customers and the intermediaries along with everything we do. We cannot afford to have failures in our service delivery. We need to make sure we get it right.
We therefore allow ourselves a little bit more time on the pension side. At the same time, we have an ambition to further improve our client servicing. If you look at NN Life, David already hinted at it, we have been able to improve the client service score expressed through the Net Promoter Score. We came from a low of -32 in 2011, we are now at +2 in 2017, despite the expense reductions. We need to keep this momentum going in order to stay in tune with the market. One of the drivers is cost reduction. Cost reduction is simplifying our operations and IT landscape. We've got many migrations ahead of us, migrations mean challenge.
We have confidence because we already migrated over the last couple of years, over half a million policies, both on the NN side as well as on the Delta Lloyd side. We've got a successful track record we can build on. Let's have a look on how we can drive value through optimizing risk-return on our investment portfolios. Since the IPO, NN Life has been optimizing the balance sheet by investing in higher-yielding assets. We've invested a total of EUR 8 billion, mainly in mortgages, corporate bonds, and real estate. These investments were mainly funded by the transfer of the separate accounts to the general account and through the sale of government bonds. We expect the investments in higher-yielding assets to continue, and we can now include the defensively positioned Delta Lloyd portfolio into our optimization plans.
We expect to continue our increase of net allocation to mortgages, loans, corporate bonds and real estate, and to continue to reduce our exposure to government bonds. It was discussed extensively in the morning session already, nevertheless, it's important, I'll say it again. The sale of these government bonds may have a negative impact on the IFRS investment margin going forward. It will support the Solvency II capital generation and consequently, the free cash flow generation. Have a look at the capital release of our closed books. Both NN and Delta Lloyd have large individual life closed book and pension back books, I should say, which are expected to decrease over time. The capital backing the SCR of these businesses will gradually be released in line with the run-off of these portfolios.
We expect the SCR to reduce by EUR 1.5 billion in the next 10 years, of which more than half is driven by the pension back book. The SCR of the pension back book is much larger in size and it will take longer to run off due to the longer duration of the liabilities, as it includes both the accumulation phase as well as the payout phase of the pensions. The expected run-off pattern you see on the slide assumes the portfolio develop in line with our best estimate assumptions. It doesn't allow for potential increases in the SCR, for example, due to changes in our asset mix, reinvestments in new business opportunities, and renewals. The release of this SCR will continue to support our remittances to NN Group.
In short, we are the number 1 life insurance company in the Netherlands with a solid financial base, a strong and sizable position in the Dutch life and pension market. We have four key drivers to create value and generate cash going forward. We have a proven track record in reducing expenses. The integration will enable us to continue to do so. We will continue to optimize the asset portfolio by investing in higher-yielding assets to support our capital generation. We will manage the closed books. As such, provide a predictable capital release as these portfolios run off. Finally, we are very well positioned to capture the opportunities both on the short as well as the long term in a changing Dutch pension market to write profitable new business. With that, I would like to hand it over to Karin. Thank you very much.
Thank you very much, Michel, and also to Leon and David for sharing your insights on the Dutch businesses and how we're progressing and the opportunities. I'm sure you've got loads of questions for David. I'd ask you to save those for later because we have a Q&A session later in the afternoon. Moving on to our asset manager, I would like to invite Satish Bapat onto the stage and share with us the insights on the distinctive capabilities of our asset management business. Over to you, Satish.
Thank you, Karin. Good afternoon all, in the room here, but also on the webcast. Let me start off by introducing myself. My name is Satish Bapat, and since April of this year, I head the asset management businesses, now combined NN and Delta Lloyd. I realize I'm the last speaker before the break. I'll make sure I keep it on time. In the next 15 minutes or so, I'll walk you through our businesses. We are a well-diversified active asset manager with significant strengths in multi-asset and fixed income capabilities. We currently manage approximately EUR 244 billion of assets that generate a little under half a billion EUR of fee income on an annual basis. The acquisition of Delta Lloyd Asset Management, or DLAM for short, brings us additional scale and capabilities.
We are well underway to integrate the two businesses of NN IP and of DLAM, and we expect to be substantially complete by the middle of 2018. We also expect the resulting cost synergies to be around 5%-10% of the 2016 combined cost base of the two businesses, and that we expect these to be realized by 2020. This is a picture of our combined businesses, both of NN and DLAM. What you see on the left-hand side is two pie charts, where you see the third-party assets are roughly a third of our total assets that we manage, but they contribute over 60% of our revenues. Of the third-party assets and the revenues we get from that, roughly two-thirds of those revenues come from retail channels, the remaining from institutional channels. On the right-hand side, you see two pie charts.
These charts, we have split the AUM and the fees and the revenues by asset class. What you see is roughly half our fees come from a broad range of fixed income capabilities and the remainder from multi-asset and equity capabilities. DLAM has brought a scale, in total about EUR 50 billion, and we have also been able to add scale in certain select capabilities. Let me give you some examples. Delta Lloyd Asset Management residential mortgages, we have been able to add approximately EUR 9 billion to our capabilities. Corporate loan portfolio of approximately EUR 2 billion. The two combined, we have been able to add to our total alternative credit offering. European small and midcap has been added to our European equity capability, roughly EUR 1 billion.
We have been able to further expand our ESG, environmental, social, and governance capabilities by roughly EUR 2.5 billion. We can absorb all of the scale at very limited additional cost. How do we do that? Three key ways of doing it. One, we are leveraging on our existing front and mid-office platform of BlackRock Aladdin, onboarding all the systems, all the portfolios of Delta Lloyd Asset Management onto the NN platform. Two, by merging the funds of Delta Lloyd Asset Management into the NN funds, both here in the Netherlands and in Luxembourg. Number 3, by integrating the investment teams and other support areas and functions. Asset management plays an important and a crucial role within the group. We bring value in four different ways. The first is we manage the underlying assets of our insurance businesses.
Second, we leverage on distribution from the insurance businesses and jointly develop defined contribution solutions. This means delivering on the right mix of investment capabilities and services based on those that we have developed and learnt along the way by being active in the third-party space. Number 3, we are able to attract third-party assets. This year, we have seen a strong net inflow of approximately EUR 5 billion for the first nine months year to date. A majority of the flows this year have come from our strong flagship capabilities, emerging market debt and multi-asset. The fourth item, the fourth way we add value to the group, is our business is cash generative.
We remit 100% of the net income that we make, or roughly EUR 90 million on an annual basis over the past 3 years. We have a strong ROE, again, around 25% over the past 3 years. Footprint is predominantly European. Most of our clients are European domiciled. We are present across a number of locations, working along with our insurance company. For example, in Poland, in the Czech Republic, where we can leverage off the distribution capabilities of our insurance businesses. We have leading positions in the Netherlands, in Belgium, and in select Central and Eastern European countries we can build on. We are also on the ground in large markets such as Italy, Germany, France. However, we have a very small market share with a potential to grow. Outside of Europe, we distribute our products mainly through institutional channels or in partnerships.
For example, in Taiwan, we have worked along with a partner, Nomura, who distribute our products in Taiwan. They distribute our Luxembourg-domiciled funds, and they have, over the last number of years, built an AUM base of approximately EUR 4 billion in global high yield and in emerging market debt capabilities of ours. In the U.S., our partner Voya distributes a number of our strategies. Our main investment hub is here in the Netherlands. We also have a few other locations where we manage assets. For example, some of them are linked to our insurance businesses. For example, in Poland and in Japan. A few others, like New York and Singapore, are required for our global capabilities. When you look at our locations here in the Netherlands, along with New York and Singapore, it is crucial to enable us to invest across time zones.
It's crucial for some of our global capabilities, such as high yield and emerging market debt. Performance. What you see on the slide is our overall 3-year track record is good. In particular, our flagship strategies such as multi-asset, emerging market debt, investment grade, continue to show consistent, strong performance. There are a couple of capabilities, for example, global equities, that need our attention, have got our attention, and we have taken actions. Strengthening investment teams, investment processes, and the first results are coming in as we speak. You will recognize a number of these trends impacting the asset management industry. Let me walk you through all four of them. The first one, low rates leads clients to search for yield and absolute return type strategies. Second, demographics. For example, aging populations will drive the need for decumulation type products.
Another important theme to mention is the change in composition that you have heard in the previous speeches as well of pension savings, from defined benefit to defined contribution. This requires working closely, in our case, with the insurance company to jointly develop products, product offerings, and engaging with clients. Number 4 is the pace of technological and regulatory change is requiring asset managers to become more efficient and more agile. Moving on to the next page. Our response to these themes that impact our industry is by focusing on our distinctive capabilities, on building them out. For example, we are expanding the absolute return offerings in our multi-asset strategies. Fixed income, which traditionally has been our strength, our DNA, we continue to invest and grow in. We are also building out capabilities in alternative credit. In equities, we are making choices.
Focusing the fund range on higher conviction flagship strategies, leveraging on our European expertise, and where we are able to make a difference. Furthermore, we are increasing our focus on ESG, environmental, social, and governance strategies. We have currently more than EUR 7 billion in ESG strategies. Of our total AUM, we have over EUR 50 billion in ESG integrated into our investment processes. At the same time, we are looking at reducing complexity. We are doing this by assessing our range of products, simplifying our processes. We are also developing a number of innovation themes. For instance, we take our investment decisions based on fundamental analysis, behavior analyses, and what I would like to call a combination of man and machine. Human creativity along with machine rigor. We have implemented this in our multi-asset capabilities, and we are working on extending this across a broad range of our capabilities.
Let me walk you through the DLAM integration. We are well underway to get this substantially done by mid 2018, ahead of our original timetable and schedule. Some of the key steps that we have accomplished to date. One, we made key people, product, and system decisions very early in the process. Second, we obtained approval, what's called a DNO, a declaration of no objection, from our regulator, De Nederlandsche Bank, in September. In October, we onboarded all the portfolios from Delta Lloyd Asset Management onto our NN's platform of BlackRock Aladdin. In the coming quarter and a half, we are focusing on 3 distinct steps. One, is we'll merge all of the lux funds of Delta Lloyd into NN's fund range. This will happen in December. Next week, actually. Second, in Q1 of 2018, we'll migrate the back-office processes onto NN's back-office platform of SimCorp Dimension.
Number 3, we will merge the two businesses. The legal merger will take place on the 1st of January, 2018. Now, after we complete the integration of the two businesses, we expect to absorb 85% of DLAM's 2016 cost base. Our 2020 target, as you see on the chart on the right-hand side, reflects savings from integrating the two businesses of NN and Delta Lloyd, and it absorbs inflationary and regulatory pressures, such as implementation of MiFID II. Now, no integration is without challenges. We have been able to anticipate challenges and have taken appropriate steps to address them. Of course, as you would expect in the asset management industry, the biggest challenge in any integration relates to our people and to our clients. Our overriding aim was business continuity and the retention of key professionals, especially within the investments and sales areas.
The good news is we have been successful in doing so. Our teams, including myself, we have actively reached out to our clients throughout this process over the past few months of integration. Post day one, we have not seen any significant outflow of assets. To conclude, we have strong capabilities in fixed income, distinct equity, and multi-assets, and we'll continue building on those. Being part of NN, we have a strong knowledge of the needs of pension funds and insurance companies. The acquisition of DLAM brings both scale and skills to our business. We are on track to substantially complete the integration by mid 2018, and we'll extract the full cost synergies by 2020. Many thanks for your time, and let me hand you back to Karin.
Thank you very much, Satish. We will now have another short break, coffee will be served in the lounge once again. Where we had it before. We will break for around 15, 20 minutes, so that we're back here at 2:25 CET. Welcome back. Can I ask you once again to switch off your mobile phones and get ready for our international units? I would like to ask Robin to join me on the stage, to take us through the developments in the European and Japanese business units that we have. After Robin, we will have a presentation from Jan Van Autreve on the Belgium business, and then the Q&A. Robin, first, over to you.
Good afternoon, everyone. Being positioned at the back end of the day, some might consider us the tail-end Charlies. Actually, some of you may know I like my rugby, and there's a guy called Eddie Jones who's the coach of England. He calls the guys who come on, some people call them the reserves. He likes to call them the finishers. I mean, you should consider Jan and I the finishers.
Very good.
It's great to have this opportunity to provide you with an update on the international businesses and to outline our priorities over the next few years. The key message I would like to convey today is that we have a strong, growing, profitable portfolio internationally. We are outperforming our targets, and we have committed management teams across the markets who are making a real difference. Over the past three years, our organization has matured and developed significantly. Good financial discipline has led to a pruning of some businesses and products, with a focus on profitable growth. We continue to deploy capital to protection business and capital-light savings products, and we'll continue to broaden our distribution reach, particularly through our agents and bank assurance partnerships. You will see in the financial results, this strategy is working.
In the following slides, I will give you an update on the progress we are making and the strategy we are deploying. Just to remind you, we operate in 11 countries across Europe and Japan. To give you a sense of scale, our Japanese business generates about the same value of new business or operating profits as our European operations combined. As Lars said earlier, the international business accounts for around 30% of the group's operating profits. In terms of the portfolio, we are well-positioned in most markets, and all business units are improving their returns and profitability and funding their own growth. What is particular about our businesses is that we built these organically. This provides us with a deep understanding of the local business environments. Central and Southern Europe is our heartland, where we are a leader in life and pensions.
We are able to generate good margins in these markets, where we are currently seeing signs of recovery in terms of GDP growth, bank activity, and increases in disposable incomes, which we expect to translate into life and pension market growth over the next few years. In the meantime, most of the growth that we are currently achieving is through capturing market share in the high-margin protection business. In Japan, there are two catalysts for growth. The first is economic growth, where greater business confidence among small and medium-sized enterprises is driving up the demand for the COLI product. Given our strength in this niche, we are benefiting from this growth. Secondly, the relatively strong margins in the COLI segment is also attracting a number of the larger Japanese players, such as Nippon Life, which is driving up the total size of the COLI segment.
Whilst we are growing, our market share is actually around flat at about 10% or 11% of the COLI segment. The next stage of development for our international businesses is to accelerate. This will be done through the introduction of new technologies, allowing us to engage the customer more frequently and with greater relevance. This will require us to invest more in our capability development and drive new levels of collaboration across our businesses. The four key priorities we are focused on in the international businesses are shown on this slide. We have exited a number of businesses and business lines where we were not the natural owner or where the financial returns did not meet our requirements. These include Luxembourg, Ireland, and in Belgium, the corporate sector savings market.
Right across the portfolio, our management teams are taking proactive and responsible decisions to only write business which adds value to our shareholders. On distribution, we are focused on transforming the productivity of our tied agent channels. For example, the proportion of new business sales conducted digitally with straight-through processing has increased significantly. In the past two years, Poland has gone from a manual paper-based sales process to almost 100% of its sales now it's executed digitally. Hungary is now able to issue protection policies on demand in real time, compared to the 11 or 12 days it used to take. We continue to build out our bank assurance relationships as a key growing channel. In the last 12 months, we have agreed distribution partnerships with banks across Europe and Japan.
These include a new long-term agreement with Piraeus Bank in Greece, our bank in Turkey, Raiffeisen and Alior banks in Poland, Moneta Bank in Czech, and Erste Bank in Slovakia. In each of these cases, we've been selected because of our strong products and focus on excellent customer service. We continue to innovate and develop new protection and savings products across our markets, which is driving our VNB growth. Over the first nine months of the year, this growth has been equates to 48% in Europe and 68% in Japan, compared to the same period last year, and excluding the Delta Lloyd numbers. This is helped by our businesses targeting new customer segments, including young families in Romania, young families as well in Greece, and SMEs in Poland. Last time I shared the relentless focus that we have on the customer and our mapping of key customer touch points.
This work continues. It is making a difference. More and more, we're doing this in a digital form, reducing costs, improving engagement, and delivering high NPS scores where we continue to differentiate in our markets. This has also resulted in lower lapses and capturing maturing policy holders, which as you know, also has impact on our VNB and key metrics. The benefits of focusing on these strategic priorities can also be seen in financial results where we've delivered on our previous commitments. As you can see on the chart on the left, the operating profits are up by 40% to EUR 367 million in international versus the same period three years ago. Value of new business, a key measure used by all of our management teams to allocate capital and manage products and sales, is up by 86% to EUR 248 million over this three-year period.
Our net remittances are up 35% to EUR 257 million, and our return on IFRS equity also shows good improvement, particularly in Europe, where excluding Delta Lloyd Belgium, the return on equity was actually 11.3% at the end of the third quarter. We do have some headwinds. In many CEE markets, salary inflation is putting pressure on our cost base, and we also continue to experience political uncertainty around the Pillar 2 pension businesses, particularly in Poland and Romania, where future legislative changes may reduce our returns. That said, even with these headwinds, we are targeting mid to high single-digit growth in operating profits. What's next? As you all know, the international business is a growth area of NN. This is built upon solid foundations of financial management, clear strategic choices, and rigorous execution. The next phase is to accelerate. We need to achieve this.
We need to increase our investment in emerging capabilities, namely digitalization, proposition development, technology convergence, and increasing our organizational agility. Investing in these capabilities will allow us to accelerate our four strategic priorities of capital deployment, deepening distribution, growing our customer base, and differentiating our customer experience. This will allow us to grow in our chosen markets where we see strong potential for growth. Looking to the future, our first priority is continued disciplined capital allocation in Insurance Europe and Japan. On Europe, as I said earlier, we are delivering a return on equity on a like-for-like basis of 11.3%, although this has dropped to 9.9% due to the inclusion of Delta Lloyd Belgium. The chart on the left shows the majority of our countries produce strong IFRS returns above the risk-adjusted cost of capital set at a group level.
Post-acquisition of Delta Lloyd, Belgium has become our largest unit in terms of allocated IFRS equity. This can be seen by the width of the Belgium bar on the graph. As you can see, Belgium is not currently producing returns in line with our expectations, and we will be leveraging the benefits of the acquisition, namely greater scale and broader distribution, to materially improve this. Jan Van Autreve, our CEO in Belgium, will provide details later. The other two entities with a negative return are Turkey and Bulgaria. These are much smaller entities in capital terms, but are both experiencing strong improvements in profitability and value of new business as we increase our scale in these markets. Our target is to have all markets, including Belgium, delivering returns above their respective cost of capital by the end of 2020.
You can see in the middle chart the progress made in Europe to allocate capital to those product lines where we are generating good VNB margins. In particular, towards protection business, where margins remain healthy and where we are introducing new propositions. Across our savings businesses, both traditional and unit-linked, capital-light products now represent 88% of the total new business sales. Overall, our products sold in Europe have a payback period of around seven years, and this is expected to come down as the proportion of protection business increases. Looking to the chart on the right, we will further reduce the capital tied up in low return back books. The total proportion of technical reserves with historical higher guarantees is reducing. This will be accelerated through conversion projects and increasing the new business of capital light, higher return products.
We are starting to experience signs of recovery and increased growth in many of our chosen European markets, and will continue to allocate capital to high return, low payback period products. Given these factors, we are confident that we can commit to higher remittances equal to our net operating returns, as Delfin shared earlier. Turning to Japan. As you know, we are delivering strong, profitable growth in our Japanese COLI business, as reflected in our VNB and IFRS operating results. This is profitable business that pays back on average in five years and has an IRR of over 15%. High levels of new business growth results in higher levels of new business strain due to the initial acquisition costs being taken immediately under the JGAAP. It is our JGAAP profits that drive the dividend capacity from the Japanese business. You can see this coming through in three charts.
We have generated EUR 146 million of VNB in the first nine months of 2017. This new business then comes through in the JGAAP earnings and remittances over time, with the initial new business strain being paid back reasonably quickly. On the chart on the right, the orange blocks show the COLI in-force operating earnings, the blue blocks the new business strain, and the gray blocks the net of the two. While new business strain has increased from higher sales, the COLI in-force profits have also grown, with an overall increase of around 16% over the past two years. Over time, we expect the COLI profit growth to continue and to be reflected in higher remittance capacity. Our second strategic priority is deepening and diversifying our distribution. We have two dominant distribution channels in Europe, banks and tied agents.
In both channels, proposition development and digitalization of our customer facing and back office processes will be important, driving stronger growth and cost reduction. We believe we can increase the value of our portfolio by playing to our strengths and focusing on these core channels. We see good growth in banking activities as our markets recover from the financial crisis. As a consequence, banks offer access to a growing, high quality client base. Indeed, around two-thirds of our VNB growth in Europe is through our banking partnerships. Banking products provide a natural fit for our life and protection propositions. Done well, bank partnerships offer long-term opportunities for high scale, low fixed cost, good return business. Turning to tied agents, NN is known for having high quality sales forces across our markets, where personal relationships still really matter.
These longstanding relationships with our clients is the true power of our NN Tied Agent network, as our customers continue to value professional advice relating to pension savings and life products. Our vision is to transform our tied agent network into a highly qualified, digitally enabled, highly productive sales force that is able to engage and support our customers in a personalized way. Now, in addition to these two core channels, in large markets where bank assurance dominates, such as Spain and Turkey, we are looking to grow in these markets with more disruptive strategies, which I'll give you an example of later. We have also significantly expanded our bank distribution in Japan, where, as you can see, the value of new business has nearly doubled. We believe there is further upside with the banks as we deepen our relationships and expand our product set.
In 2017, we entered into 14 new bank relationships, including one mega bank, Mizuho. A further relatively new partnership is with Sumitomo Life. Sumitomo are selling our COLI products through their powerful distribution network of 35,000 sales agents. This is an eight-year exclusive partnership, which only started in April of this year. Early signs are encouraging. Across all channels, we are diversifying the product mix by selling more protection propositions in Japan as well. This is requiring us to upgrade our sales, underwriting, and claims capability. This involves investment but has strong payback in terms of value. Our third strategic priority is growing our customer base through innovation. Given the speed of change in our customers' expectations, it is critical that we invest in building out new capabilities and new insurance propositions to ensure that we stay a step ahead of the competition.
Let me give you a couple of examples where we're making good progress on innovation. In Prague, we are building a data analytics and underwriting hub, which will serve all of our international businesses, allowing us to enhance our customer segmentation, improve our pricing, improve our claims management, and identify more profitable customer segments. A second example is the Sparklab concept. Pioneered in the Netherlands and now copied in five international markets. The objective of the SparkLabs is to work on new and disruptive thinking where we can experiment with new ideas and test and learn quickly. Each of our international SparkLabs focuses on a different theme. For example, our Sparklab in Japan is thinking through the SME ecosystem. In Hungary, on wellness concepts, and in Turkey on disrupting distribution.
Picking up on this example, the majority of life insurance in Turkey is sold through banks in combination with bank loan products. As almost all banks are tied to long-term distribution deals, we're looking to disrupt the market by developing innovative online distribution. Sparklab Turkey has taken a stake and partnered with the leading Turkish online aggregator, hesapkurdu.com. Yeah, easy for me to say. hesapkurdu.com This exclusive partnership with this fintech gives us the opportunity to connect and engage with their two million unique users. Having only completed this deal earlier in the month, it's too early to know at this stage how successful this initiative will be. I think it's a good example of the type of targeted innovation and targeted investment that we are making. Our final strategic priority is to differentiate our customer experience across all of our markets.
In order to accelerate growth, it is critical that we set ourselves apart in terms of the level of engagement and the level of service we provide to our customers. One way we are achieving this is by continually investing in new, innovative, modular protection propositions and by collaborating across our markets. We have developed product proposition principles now embedded in our markets to help identify and address our customer needs in any new products. This is being done in an increasingly personal and relevant way. This includes simplifying the customer experience with digital illustration tools, paperless process, and e-signature capability. This has been enabled by making more of our technology cloud-based, pushing greater convergence of technology solutions across our markets and driving best practices.
A good example of this is the recent launch of a Salesforce-based platform in the Czech Republic and Slovakia, combining lead management, sales management, straight-through processing, and electronic signature available on any device. This was rolled out to our Slovakian brokers this month and will make a significant difference to the customer experience of buying a life or savings product in terms of both the time taken as well as the digital experience. As I said earlier, international is a growth engine for the group, and we are confident that the business can deliver higher operating profits than previously committed in both Europe and in Japan. On remittances, we expect to be able to remit dividends equal to our net operating profits in Europe due to our focus on protection, capital life products, and management of the back books.
In Japan, we will continue to deploy capital to high-quality, high-return new business, which in the short term consumes capital, but which in the medium term builds value and increases remittances. Let me recap. There are really four takeaways. International is delivering on its priorities and on its financial targets. Given the markets that we're in, we see the opportunity to generate greater value by accelerating our growth. We will invest in innovation and our digital capabilities, driving higher levels of customer engagement and stronger propositions. Ultimately, this will deliver a larger customer base and higher remittances. Thank you very much. It's now my pleasure to hand over to Jan Van Autreve, the Belgium CEO, who will cover off the progress that we're making with the integration of Delta Lloyd. Thank you.
[inaudible] Good afternoon, ladies and gentlemen. I'm Jan Van Autreve. I'm heading the Belgium insurance activities of NN, and I started this role as of July last year. Previously, I was also the CEO of Delta Lloyd Life in Belgium, so I had the advantage of knowing both the Delta Lloyd and NN company in Belgium very well. In the next 10 to 15 minutes, I will show you that the combination of the life activities of NN and Delta Lloyd will create a viable and profitable business model in the Belgium market. The integration will allow us to grow our business, improve our business, and reduce our cost base. Our strategic positioning will create value and optimize our capital base, which will lead to a healthy dividend contribution to the holding company.
We expect this contribution to be significantly above our net operating results in the foreseeable future. I will start my presentation by first giving you a view on the profile of the combined entity. I will explain our strategy and the opportunities we see in the Belgium market. I will explain how we are managing the integration process and how we are creating value in doing so. Let's start with having a view on the combined entity. Together, we are the number 4 player in the Belgium life market segment. We have a market share of almost 7.5%, so we doubled our market share. We have a market share of almost 11% in the unit link segment, and we have a significant footprint in the life protection segment with a market share of above 19%.
The Belgium team is dedicated to provide an excellent service to our 1.4 million customers. If you know that in Belgium we have a population of around 11 million people, approximately 4 million households, then this means that we have an excellent penetration rate which offers further up- and cross-selling opportunities. The new company has a strong multi-channel distribution network to reach our customers. In fact, we achieved diversification and broadening of our distribution by combining, on the one hand, the bank channel of NN, and on the other hand, the broker channel of Delta Lloyd. It's important to note that both the businesses in Belgium are very complementary. By combining them, we're well-positioned to grow in life protection and unit linked. Those are also the 2 segments where we see further opportunities in the Belgium market.
We see there's a growing customer need for life protection and unit linked, and therefore, we have set both segments at the core of our strategy. On the protection side, customers are increasingly aware and willing to use term life solutions to secure the financial futures of themselves and their families. This awareness is driven by a decreasing Belgian social security system due to government austerity measures. We also see an increasing trend of affluent clients who buy more and more term life solutions. This is an area as well as a client segment in which we have great expertise. The opportunity in the pension market is driven by a low state pension, which is on average below EUR 1,000 for an employee, and even below half of that for a self-employed person.
It's clear that those pensions will not guarantee sufficient purchasing power at the age of retirement. On top of that, it will be very difficult for the Belgian government to increase these state pensions, as the cost of the current pension system will only rise due to an aging population. The Belgian people know this, they're aware of this, and they know that they need additional pension solutions. Within the pension segment, we focus on unit-linked solutions along the whole life cycle of our clients, as we believe that the Belgian market will convert more and more to unit-linked over time. In both the protection and unit-linked segment, the combined entity has a strong footprint in terms of market share, client expertise, and product expertise.
We want to maintain this footprint by investing in our underwriting processes, our pricing processes, and improved client experience, as well as in product innovation. We will bring our products to the market through the bank and the broker channel, which are also the two dominant channels in Belgium, and we will continue to invest in the further development of both. Let me explain how we want to manage the integration process in Belgium. Our plan has been designed to move as quickly as possible to one company. Let me explain what I mean with one company. One brand, one streamlined product offering, one organization, one leadership team, one legal entity, and one location. This clear narrative is appreciated by our clients, our distribution partners, and our employees, and will result in the realization of cost synergies.
In addition, on the IT side, we will work step by step to reduce complexity and to decommission all obsolete systems. As a result, we aim to reduce our cost base by approximately 15%-20% by 2020. Because the decommissioning of the IT systems is a step-by-step process, we expect that the overall cost synergies will be slightly back-end loaded, as you can see on the slide. Obviously, an integration process requires a lot of effort, a lot of work, also a lot of fun, I hope, but we will face challenges. It all starts with our people. Keeping our people, our staff motivated during the whole process will be key. Therefore, we communicate clearly from the beginning to our people what they could expect in terms of timing and process.
We quickly assigned the leadership team, we made an early decision to move to the Delta Lloyd office. On the distribution side, we now need to manage two channels, the broker channel and the bank channel, two channels with different needs and different demands. In order to maintain a competitive support and service to both the channels, we have set up dedicated sales teams and dedicated support teams. Yes, we have a complex IT landscape with several legacy systems, I think that the IT part of the integration will be a very challenging part. In order to manage it successfully, we have defined some integration principles. First integrate, then upgrade, in general, the NN IT infrastructure and the NN systems will be leading. By applying those principles, we can mitigate having time- and money-consuming discussions, we ensure to keep the integration pace.
How are we going to build to the value creation within NN Group? Our clear strategic focus on life protection and unit linked, combined with our improved cost base, will have a material impact on the value creation and the profitability of the combined entity. The graph on the left shows the product mix of our current sales. Roughly half of our sales in 2016 was related to traditional savings products. These are products which offer a guaranteed interest rate and are, by consequence, capital intensive, less profitable, and even VNB negative. The other half of our sales in 2016 is related to life protection and unit linked, which contributes to VNB and have a relative short payback period.
It's our ambition, and this is really important, it's our ambition to increase the weight of the VNB positive life protection and unit linked part of our sales to 80% by 2020. This will have a significant impact on the VNB, and therefore the capital generation of the combined entity. How do we want to achieve this ambition? How do we want to realize this 80% target? We know that we can further develop and grow our life protection business through the existing partnerships. Here it's more a question of maintaining those partnerships. We are well known for our life protection solutions and our competitive pricing. Through the Delta Lloyd acquisition, we now add specific expertise in life protection in the affluent client segment.
The shift from traditional savings to unit linked will be a challenging one, as the Belgium market still relies heavily on these traditional savings products. After the combination with Delta Lloyd, we now have access to unit linked solutions in all market segments, being the retail segment and the business segment. We now have access to unit linked solutions along the whole life cycle of our clients, being the accumulation phase, where you build up your pension, as well as the decumulation phase as of the age of retirement. We are adjusting our pricing and marketing strategy to be fully aligned with our strategic ambitions. We also want to create value by optimizing and managing our capital base in a disciplined way, and we already did. We significantly reduced the SCR during 2017 by de-risking and taking reinsurance management actions.
Currently, the majority of our SCR is related to the traditional savings book, which will unwind rather slowly over time, as you can see on the graph. Going forward, we expect that the capital release coming from the unwinding will be offset by the capital strain from the new profitable business. Therefore, in order to improve further SCR, we are looking into management actions to accelerate the unwinding of this traditional savings book. This brings me to the last slide of my presentation. If I can summarize for Belgium, the combination of both companies create a viable and profitable model, well-positioned to capture on the Belgium market opportunities. We are reducing our cost base by integrating both companies, and we will continue to focus on the profitable new sales coming from life protection and unit linked.
This, taken with our efforts to manage our in-force book, will lead to a healthy dividend contribution to the holding company, and we expect this contribution to be significantly above the net operating results in the foreseeable future. Thank you very much for your attention, and I hand over back to Karin.
Thank you very much, Jan, and also thanks to Robin. That concludes our presentations on the business units. I would now like to go to the second round of Q&As, and therefore invite David, Robin, and Satish onto the stage to answer your questions. As a reminder-
Yeah.
If you do have a question, please raise your hand, wait for the microphone, state your name, and also please limit yourself to two questions each, so that others also have the opportunity to raise their questions. I already see a first question here from Cor Kluis.
Cor Kluis, ABN AMRO. Two questions. First of all, about the non-life business, especially focused on the high combined ratios. In which distribution channel can we find the highest combined ratio? Is it also in the mandated channels or. Could you elaborate on what are the good distribution channels and then the less good and how you want to solve that? Second question is about the Japan Life, which is, of course, quite profitable from a value point of view. The cash remittance is, of course, lower than the net operating profit. Can you give a little bit better idea about the value creation within the Japan Life operations? Because it's not very clear from an associate framework point of view.
Maybe something about own fund generation on a Japanese basis or the way we should look to the real value creation within the Japanese operations, which might be higher or similar to the net operating profit in a specific year. Yeah.
Thank you.
Yeah.
Pretty clear who answers them.
Yeah. Thanks, Cor. Yeah. On non-life, so on the distribution mix, well, probably not very surprising, we see the direct channel with OHRA doing well. Also, we see both banks, ABN AMRO and ING, doing well. Within the broker portfolio and the mandated portfolio, we've seen in the last 2 years different patterns. There's not a clear pattern that the broker portfolio does better than the mandated or the other way around. We've seen different patterns. In general, I think also we need to be careful with the broker portfolio. For example, the D&A business has been doing well. Specifically, I think on the property and casualty side, there we have challenges with the broker channel. It's actually both on the broker and the mandated agents.
On the Japan side, thanks for the question. I think I gave you an indication of the inherent profitability of the products, in terms of the payback periods and the growth that we're seeing in the inforce book. I think the way that I think about the value, because obviously we don't have, let's say, embedded value measures and things like that. The way I think about it is actually quite simply related to the value of new business. Our value of new business measure is economic measure, that is meant to represent the value that we are creating each year. If we look at the nine months to end of September 2017 on page H4, you can see to this point, EUR 146 million of value has been created in the form of VNB.
I do think in terms of if we were to look at more traditional, the economic measures like embedded value, you would see over the last few years, as the business has been growing, selling more and more protection business with the sort of returns that I told you about earlier, that actually the value of that business has been rising over time. Obviously, we expect to see that coming through in remittances. Again, that's going to be over time, because in the short term, it's going to be offset by the drag of the new business strain.
I saw a question here first from Benoit, then we'll get back to that side of the room.
Benoit Petrarque from Kepler Cheuvreux. Question on the bank earnings. You are running the bank at 15% return on equity currently. If I plug the cost cutting, you could easily get towards the 19% return on equity, just the EUR 35 million adding up to the figure. You get more transfers from Westland Utrecht still, I think, still volumes to come. I'm a bit puzzled by the 10% return on equity plus target. It's not really ambitious and quite far from current levels. What do you see? Do you expect NIM pressure, net interest margin pressure? Do you expect higher loan loss provisions, though I think the cycle is pretty good right now? Or just more capital? Could you just clarify how the equation works on the bank? Thank you.
Okay. Yeah, thanks. Indeed, there are offsetting things here. There is some downward pressure that we expect. I think on the WUH, the WestlandUtrecht portfolio that we got from ING, out of the EUR 3 billion, we still have EUR 1.5 billion of resets to go. All of these resets will go at a lower margin. There we see some downward pressure that we already know is coming. We know that currently the mortgages that we sell have a lower spread than, let's say, last year or the years before. Savings has been particularly favorable as well. We've been able to lower our savings rates. The question is how is that going to evolve going forward. On the loan losses, indeed, we had quite some releases on the loan loss provisions because of basically the strong economy, unemployment going down, but also LTVs dropping.
We don't expect that this trend will continue. At a certain point, you get to a level where you think you would be careful to further lower it. On the capital side, indeed, we have some expectations coming. The capital conservation buffer will be increased on the ECB regulation. Basel IV is coming, which also will create some uncertainty. The combination of those factors led us to conclude that we should be aiming for at least 10% ROE.
Thank you. Let's move to this side as well. Here. Albert Ploegh.
ING. Two questions from my side on the P&C. First of all, yesterday in the cons call of AZ, it was a bit suggested that after a period of tariff hikes, they were expecting some kind of a pause in the market in general. Do you share that view as well? The second point is, if I look on the growth within premiums, especially on the P&C side, as you're also going through a phase of some pruning of the portfolio, should we expect still on balance growth in premiums, or are you happy with a flattish kind of outlook and basically focusing on improving the underwriting and lowering the combined ratio? Thank you.
Yeah. I think on the market, we have been seeing premium increases. The question is, how is this evolving going forward? I think, to be honest, going forward, this is going to get harder and harder to judge, because the more we move into a world where we see individual underwriting based on risk groups, the less easy it will be to say our premium's going up or down because some of it could be going up. In other risk categories, premiums could be coming down. I think you've also seen in Leon's presentation that also we are now based on our claims experience and our data, we will be also differentiating more and more in our premium. It will be less easy to judge whether the whole market's going up or down because it's more risk based.
On premium, I think it's difficult to forecast, but relatively flat we would expect, and we're okay with that. After all, we do position this as value over volume. On the back of premium increases, you would expect premium to grow a bit. At the same time, as Leon mentioned, we're also rationalizing certain portfolios. That plays a role. We're stopping certain portfolios. In the broad scheme of things, we expect a relatively flat development, which is again okay for us because we're really focused more on value than on volume. Given that we already have a lot of volume, so we don't have a scale problem.
Thank you. I'll first go to Farooq, then I'll go back to you, Nadine.
Hi there. Thank you very much. Farooq Hanif from Credit Suisse. Just a question on the DB book. You've mentioned EUR 3.5 billion of SCR. I think that chart is X new business. We always have this question about when will we start to see that profile releasing capital? It sounds like it's going to be a long time, but I was wondering what you can do to manage that, to accelerate it, what the timeframe was. Just some discussion around that. Secondly, going back to Japan, slightly cheeky question, which you've probably been asked about 100 times since yesterday evening, but if you have this issue of VNB looks great, but you can't get the cash out, isn't there a better owner of the Japanese business?
Do you perhaps want to cover that Japanese question first, or?
Yeah, I'd go back to something Lard said earlier, which is actually in the Japanese business, I truly think we are the best owner because we are totally focused on this niche. This niche is a profitable niche. This niche is a growing niche. Why do I think that's a good thing? I think two major reasons. Because we are focused on a niche, we've only got these products that we concentrate on in terms of continual improvement. As the regulations change, as tax treatments change, we are always ahead of the pack in terms of new products. I guess the best example of that is that's why Sumitomo Life have probably come to us to get their hands on our products to distribute to their 35,000 agents.
I also think you have to take into account the Japanese regulatory regime, and again, I've had an opportunity to talk to a number of you about this, is because all new products have to be, in effect, approved by the regulator, and there's only so much capacity that the regulator has with regard to legal entities. Again, it's a competitive advantage of ours to have our legal entity focused on solely the COLI segment and focused on continually making sure our products are best in class. Our distributors know that. Yeah. Our clients know that. That's why I think even though the business, you could be concerned, I certainly have a look at the sort of tax rate and think, gosh, given the tax rates coming down, is this a problem? We're just not seeing that. We're continuing to see great growth in the marketplace.
I think if it was owned by a bigger player that had individual segments, they just wouldn't have the competitive advantage that we've created in this market. Coming back to your how do we get our hands on the remittances, I think the fact that over the last few years, the payback periods have come down. The protection business that we're now writing, again, is more profitable. I actually think we are going to be able to see this coming through in remittances over time. In the short term, obviously, there is that new business strain that we contend with. We think actually at the sort of IRRs that we're investing in, it's a really good place to be deploying capital.
Thank you very much. On the DB book?
Farooq, indeed, the graph on pensions is running off, and that's excluding new business and renewals. Keep in mind that most of the renewals are TC. The impact of that, of course, is smaller than had it been traditional DB renewals on the run-off of the SCR. Ways to accelerate. Of course, we have on the one hand, the move where we are moving some towards higher yielding assets. On the other hand, ways to accelerate is, of course, mostly about expenses. I think also this morning we talked about expenses and the plan that we have to save on our expenses. At the same time, it also depends on how the assumptions on unit cost, and we're now aiming to keep the unit cost at least flat.
I think in this stage it's too early to already assume that we can do better than that and then start capitalizing on it. For now, this is what we're sticking to.
Okay. Thank you very much. Patrick, did you still have a question? In front.
Patrick Dennis from Beco. Two IT related questions. How do you determine within NN whether Satish needs money for artificial intelligence, blockchain trials, needs a lot of money for that, International Insurance also needs a lot of money, how do you sort of get through that? I mean, deciding who gets what. Regarding the Netherlands Life, maybe some more detail on the Netherlands Life systems. I can still remember some research I read when Delta Lloyd systems seem to be more efficient and measured in certain ways, basically administering life systems. What is the sort of the move there? Is it all going to move to Delta Lloyd systems or is there perhaps a sharing of systems? It seems like a big IT project, and we haven't heard details on it.
Yeah. Do you want me to take the first one, [inaudible]?
Sure, go ahead.
In terms of the deployment of capital, it all comes to International Insurance. As you can imagine, as a board, we have business plans that we go through, and we need to make sure that wherever we're deploying the capital, whether it be IT, products, anything, that it makes sense from an investment perspective. We have all of that, the rigorous disciplines you'd imagine on that. I think where we actually benefit is we have a single CIO for the group. That CIO, when it comes to technologies, more and more, whether it be our cloud strategies, whether it be our platform strategies, whether it be our infrastructure, our security, we're all using the same basically IT capability. We're also more and more moving towards applications which are global, not different by business entity.
I think to this point, we haven't had any difficulties either in terms of, let's say, bun fights over who gets the capital. Secondly, actually, I think the benefits of collaboration are far greater because we've got that single point of expertise in the form of a CIO. David?
Thank you. On the Dutch systems.
Indeed, it is a massive IT program for the Dutch pension business. We went system by system to make trade-offs. You can't decide that in isolation, because if you have a platform that is already connected, let's say, to the general ledger of NN, and is already connected to other systems, there could be examples where maybe a Delta Lloyd platform is a bit better. You would have to do all the interfacing to the full NN environment, which would then make the whole trade-off different. I think for most systems, we've made the decision already. I think also the costs are related to the volume. What we see is we have an SAP platform within NN that actually runs well, but we still consider it sub-scale.
If we would add the Delta Lloyd pension book to this, we believe that it will actually become very efficient. We haven't made all the choices, and some of the big ones we have. For the pension book, that is the SAP platform.
Thank you. Then there was a question from Nadine first, and then I'll come back here on this side of the room.
Hi, Nadine van der Meulen from Morgan Stanley. A question for David. I suppose high level in the Netherlands. With regard to new business value, you talk about the pension landscape and NN being extremely well-positioned in that market. Can you talk about the profitability? Because if I think of the capital generation, you've got the, let's say, new business value bucket, and you've got the, let's say, on the old life business, the excess spread.
I suppose that's my second question. The excess spread, you're trying to keep that up by re-risking. That's maybe not a question for you, but for somebody else. Ultimately, on an absolute basis, that is coming down because the old business is running off. I suppose my question is the development of the excess spread, let's say, on an absolute basis, and how quickly do you think you can be profitable on the new business side in the pension landscape? Thanks.
Yeah. Thanks, Nadine. Let me try to answer that. I think for pension new business, what we see is that the DC business, as I'm sure you know, is lower margin business than we have seen on the DB side. Also, we've seen it on the DC side, even though the growth is high, it took many decades to build up the DB book, and to a certain extent, we're relatively in the beginning stages of the DC book. Even though we have a large position ourselves, the market itself is still developing. The good news, of course, it's capital light, which also plays a role into the SCR. In terms of margins, it is a bit comparable to the asset management business. We expect to make a margin on assets, which will also, for a large extent, is now with NN IP.
The life insurance business will make a margin on the technical side, so morbidity. That's in the accumulation phase. Over time, de-cumulation will become more relevant. It's still very small because we do have people retiring, but they typically have quite a DB book build-up, and then for a relatively short period, DC. What we actually see is that the rollover market is still small, but we expect it to grow. In the de-cumulation phase, we will make a spread comparable to, let's say, what we now make in our general accounts. I'm not going to try and forecast how that's going to develop. As you know, that depends on many factors. We will make a spread there, and then we will have the longevity risk or the technical margin that we can make a margin on.
I think the combination of that is that it will be lower margin. Indeed, the book is running off. It will not fully replace what we now see on the DB. You would expect, therefore, also capital return, as Delfin has been explaining, that then gives us an opportunity to allocate that somewhere else. Having said that, we are optimistic about that we are able to build scale in the DC environment, and therefore, also create a bigger platform on the back of also market developments that are really taking off now.
Thank you. Let's first go to Kunal. You had your hand up. Then I'll come to you, Arjan van Veen.
Yeah. On the Netherlands Non-life again, the combined ratio target was 97% at the time of the IPO as well. I think in 2014, it was actually in that range. After that, consistently it has deteriorated. What gives the management confidence that this time around it won't happen the same and the target will be achieved? That's one. Second on the Insurance Europe business, do you think for example, Spain is a strategic fit, at this point or some of the businesses which have lower ROEs, such as Belgium or even Greece, et cetera, Turkey? Will there be more value if you all did not have that? There is some path towards higher ROEs and definite profitability in the future? Thank you.
Thanks.
Let me take the question. Indeed, around the IPO we all set to 97. It was above 97 also then. To make my own life even more difficult, the definitions are not completely comparable. As you've probably seen, we have adjusted our definition of combined ratio to be more in line with the market. Which doesn't really have an impact on P&C, but it does on the D&A combined ratio. Why believe it now? Well, for a few reasons. I think one is, as I was saying, there is a significant part of the lower combined ratio is coming out of expenses, because of scale and of the expense savings that we have announced. That makes it more controllable for us than the other improvements that we've made. Well, we talked about the market.
We have seen that the market is high and therefore there is room for premium increases without driving out the good risks. That's helpful. What helps is that, I think on the fire, we've been relatively successful in bringing down our combined ratio, and now we need to prove that we can also do that again with the Delta Lloyd book, but it is confidence that we've done it before. Motor has been difficult on many accounts, but a lot was driven by prior year results where we've strengthened our provision in Q2 with EUR 40 million for motor and liability. The behavior so far is in line. Also there we're taking now repricing on the new book, but as Leon explained, again, that will take probably 18 to 24 months before the full book is also on the new tariffs.
We have a new business mix. We have with OHRA and ABN AMRO, we also get a different mix. There's quite a few reasons that we believe we will be now successful in bringing it to 97 or below. I fully understand we still need to prove that.
Thanks. There was the other question on the European ROE.
Yeah. It was a bit of everything. Thank you. I think let's just stand back from the portfolio. Right across the portfolio in every market we've got increasing profitability, increasing value of new business, increasing returns. We really do manage the whole portfolio for value. I think without doubt, the biggest challenge, if we just go back to my presentation in terms of the markets, given the scale of Belgium, the biggest challenge is in Belgium. The good news is actually from a strategic perspective, having done the acquisition, we now have another leg to the strategy in the form of distribution. What doesn't come through is actually the complementarity of some of the products as well, where we're now able to leverage a lot more of the, or benefit from the products that NN has into the broker channel.
That's why I think we're quite confident that actually in terms of VNB numbers, which look very stretching on the charts, are actually achievable over the next few years. On top of that, on top of the business mix changes, we're going to have to drive through the cost savings and the synergies from the integration. We're going to have to make sure that we're working on the back book to try and, whether it be conversions or others, ways of actually reducing the back book. I think if we do that, there's a very good chance that we'll achieve those targets of achieving our cost of capital by the end of 2020. That's clearly the challenge that Jan and I have taken on.
I think the last thing, which I think is a good question, which is obviously for each part of the portfolio, we've got to be certain that actually there's a profit pool there. Have we strategically got a strategy which is going to allow us to access those profit pools? Turkey's probably a good example of that. Even though we're making a very small loss there at the moment, the profitability improvement over the last few years has been quite rapid as that business has got to scale. It continues to going on that whole process in Turkey, which is really creating a new market where we're doing a tremendous job of actually capturing that market. At the moment, given all of the numbers, how successful is auto enrollment going to be in Turkey? Let's wait and see.
I really do have aspirations that in markets like Turkey, the profit pools are there. We've got a team that's in place and is very focused on accessing those profit pools.
Thank you. Here, there was a question from Arjan, I'll move back to, I think Farquhar had the next question.
Thanks. Arjan van Veen, UBS. On Japan, the growth has been coming a lot from the new channels, Sumitomo Life and the bank. It looks like you've barely touched that, the growth opportunity is still very live. Just curious as to, is there a margin differential and payback period differential between that and the other business? Maybe if I can ask the P&C question the other way around. If I look at your cost targets, that knocks three points off your combined ratio. The actions you're taking should probably knock the other two off.
What are you worried about to not get there? What are the underlying inflation trends? It's been, I think, a relatively benign year this year, relative to other years. Some investment yield headwinds. What are the key things that may lead to not getting there?
Thank you.
Should I take Japan one?
Yeah.
I think in terms of Japan, the actual traditional channel of independent agents and tax advisors continues to be a core channel for us. You're right, though, in terms of the growth, we're seeing that growth coming through, particularly in Sumitomo and the banks. You may be surprised to hear, actually, the margins are the same. There is no difference. The deal that we did with Sumitomo, we're on the same basis as, let's say, one of our preferred or larger independent agents. There's no difference in terms of margin as to where we grow it.
I think on the question on non-life. To be honest, there isn't one specific big concern. I think when your non-life is a portfolio of businesses, and in a way, we need to be on top of all of them. We can't automatically assume that OHRA or ABN AMRO or ING will continue to be at the low combined ratio. That, of course, requires a lot of work to continue that. Then we have the challenge for fire and motor that we extensively talked about. I think there's always the question on the weather-related claims, what is the impact of that?
I think for all these business lines, we have good plans in place, but we're going to have to be on top of all of them, because we can't automatically assume that we just do motor and fire and assume everything will run by itself, because that's not the experience in non-life, I don't think, in any market. We will be on top of all business units to make sure that we get the combined entities below 97.
Thank you. First Farquhar, then Johnny. Claudia.
Hi, Farquhar, Autonomous Research. Just two questions, if I may. Coming firstly on the Dutch investment allocation, I think slide nine, if I recollect. You're slightly higher on sovereigns than the industry, but it's only about three percentage points on about EUR 105 billion of assets. In terms of your de-risking strategy, do you intend to go materially below the industry average in terms of sovereign allocation? Just as a question. Secondly, more broadly on the Dutch business, you're kind of indicating flat earnings overall, a 20% cut in costs. Implicitly, there seems to be about EUR 100 million drag against earnings over the medium term. Could you just decompose that drag? How much of that is coming from the de-risking strategy, which as we say, is additive to capital generation, but negative to IFRS?
Sorry. To be honest,
Sorry about that.
I thought the other question was on.
Yeah.
I missed the second question.
The other question is the 20% cost reduction that you're aiming for.
Right
in Netherlands Life.
Yeah.
Seems to be a drag of approximately EUR 100 million on the income side. Can you decompose that, and how much is the investment margin? Right?
Yeah, exactly. If you're cutting costs by [inaudible].
Right
Why is earnings flat? Can you decompose it?
Okay.
How much of that is the active decision to de-risk?
Yeah.
Well, indeed, we do see opportunities to move more into corporate bonds, and certainly also mortgages that NN Bank originates. Mostly probably coming out of government bonds. In terms of numbers, we still need to see how we do this because, of course, spreads move, mortgage spreads move. We'll have to see over time how far we will go with this, because as you know, it's a whole mix of sensitivities on the overall portfolio that we're managing. We do see room there. In terms of cost reduction, I think we talked about it also this morning. There's many offsetting factors. Over time, we expect technical margin to come down with the runoff of the book. We expect fees also to come down with the runoff of the book, but also because we see lower fees than on the previous contracts.
Of course, investment margins are coming down. At the same time, we're trying to offset that by moving to higher yielding assets and trying to offset that by lower cost. The combination of that leads, in our view, to a broadly stable result.
I think there was first a question here from Johnny, and then I'll get to you, Claudia.
Yeah.
Hi, it's Johnny Vo from Goldman Sachs. Just a couple of questions to Robin. In Belgium, you say that you've got a return below your WACC. When you look at the solvency position of the Belgium business, it's very thick.
Is it just a function of you've got too much capital in that business? That's the first question.
Thanks.
You're going to look like a genius in a year's time.
That'll be a first.
The second question is just in terms of the Japanese banc assurance sort of deals. How are they structured? Are they structured as a JV? Are they structured in commission? What's the payback on that?
On which ones?
The Japanese.
Okay. I think in terms of the capitalization, you'll be referring to the slide that Delfin showed in his pack, which actually benefits a lot from transitional measures. I can't remember the slides. It shows the total solvency of the Belgium business to be around 342-ish something. About 150% of that is transitional measures, and it particularly relates to an old traditional savings business called the Optima business in Belgium, which runs off very quickly in the next few years. I don't think we can really. There's nothing we can do about that. There's no way that I don't think the Belgium regulator's going to allow us to start taking dividends out that relate actually to transitional measures. Your point is still well made, which is even at 190%, is there room?
What we have to do is we have to work through the integration. We have to take the Delta Lloyd business, we have to take the NN business, we have to merge the balance sheets, we have to put the businesses together. We have to work through all the implications of that in terms of the solvency and work through with the National Bank of Belgium as to what levels we believe in the longer term we need in that market. Hopefully, there's some room. Time will tell. In respect of the Japanese market, actually, with most of the banks in Japan, it's largely just on a straight distribution deal. They're not structured as JVs. The only long-term formal agreement that we have is with the Sumitomo Life.
The others are just really as distribution deals that are done literally as like you would with a broker, and it's just on a commission basis.
Okay. Thank you for that. Next question is for Claudia.
Claudia Gaspari, Barclays. I thought it was a bit unfair to let Satish get away so lightly. After all, asset management is the other area that didn't meet the target in the last plan. I wanted to understand, first of all, do you feel now after the Delta Lloyd integration that you have enough scale in your chosen segments? If not, I guess it's not a world where it's very easy to grow organically. What are the potential solutions? In terms of your portion of the cost savings, I'm assuming again, those are probably net of fairly significant investments you probably still need to make to get the asset management up to scale. What could go wrong? Where could we see an inflation in these investments that won't allow you to meet the cost savings targets? Thanks.
Okay.
Okay.
Thank you for that. You're right, I was getting away too lightly here, wasn't I? First on the second question on cost savings. I think we feel comfortable that we can target and achieve the cost saving that we have outlined this morning of, in total, 5%-10% of the combined 2016 expense base of the two entities. If you look at from a scale perspective, I think back to your first question. The way we look at scale is in two ways. One is the overall asset base, and second is scale at a level of capability or strategy. It's not just scale for the sake of scale overall, but also what's crucial is at a level of strategy. How do we get that? I think we look at three different aspects and three different ways to get there.
One is going back to what I said, is focusing on our distinctive capabilities to be able to grow in the specialized fixed income, multi-asset, as well as distinct equity areas. That's one. Second is to look at partnerships. The examples I gave in my presentation with Voya in the U.S. or Nomura in Taiwan look at opportunities to be able to partner, either to be able to fill gaps for capabilities or for distribution. Three is to look at and be open to any bolt-on acquisitions. Again, back to what Lard keeps saying is we look at this in a very structured and stringent way, both financial and non-financial capabilities. The fourth one is we stay focused as well on being able to complete the integration of Delta Lloyd and NN and deliver on that.
Thank you. Who has the next question? In the back.
Hi. Alvin from Pacific Century. I've got a couple of questions for Robin. The first is around the point around margins, where for the bank channel, based on the slide on page nine, seems to show APEs representing about 9% in 2014, and that's gone up to about 15% for the nine months of 2017. The VNB contribution appears to have gone up quite significantly from about 6% to about 22%, which therefore implies higher margins from the bank channel. The corollary to that would be the fact that new business strain appears to be higher, which has an impact in terms of remittances. If I recall correctly, the net remittances from Japan Life has been declining since 2013.
With that backdrop, should we expect that remittances from Japan would turn zero, and therefore Japan Life would be a net user of capital in the medium term? The second question, which is a follow-up to Farooq's point, which is given the limitations that you've described around the product filing restrictions in Japan, is it fair to assume that you're implying that there wouldn't be
an appropriate owner who could potentially be giving value or to allow you to monetize in the form of disposal of Japan Life.
Okay, thanks. In respect of your first point, I'm just trying to do the sums and seeing where the numbers are. Okay, 9%-15% in terms of the market share. Yeah. What we actually see is we're seeing the operating leverage coming through in the VNB numbers, particularly on the banks, because the costs are lower, the marginal costs are lower, and we're actually seeing the benefit of that coming through the VNB. I think the other thing that actually is coming through the VNB, which is a tailwind, is actually some improvements on the interest rates, which will have helped over that period as well. In respect of the remittance question, there is another aspect. Basically, we've talked about two of the dynamics on remittances. There's a third dynamic. The two we've talked about is the overall growth of the COLI business.
We've talked about the new business strain. The third dynamic is, as you remember, whilst we've got the segment, NN Re, where we see the hedging result of the Closed Block VA coming through. Actually, the operating profits of the Closed Block VA also comes through our Japan legal entity. They've been coming down quite substantially over the last few years. Basically, our dividends have benefited from the profits and the remittances kicked off by the Closed Block VA in Japan. That's coming down quite a lot. That is one reason why we're seeing remittances potentially come down in Japan. What we're very hopeful of is because we're writing this very profitable and short payback period business on the COLI side, that we start seeing that come through in the remittances over the next few years.
In the short term, we are also investing in that new business. Would I expect it to get down to the very low levels you mentioned? No. I think they're the three dynamics that you should consider when you're thinking about that block. Your last question with regards to, let's say, the best owner concept. At this stage, we believe that we are the best owner of that business. We believe for all the reasons I mentioned, that as a consequence of, let's say, our unique positioning, solely focusing on this niche, there isn't another owner that, in effect, can create the value that we can from operating in that niche.
Thanks. Question from Steven Haywood.
Hello. Steven Haywood from HSBC. On the Japan side of things again, sorry. Can you remind me of the remittance constraints under the JGAAP operating profit? Is it?
The what constraint?
Remittance constraints.
Remittance constraints.
Okay. Thank you.
Is it five-sixths or four-fifths of JGAAP profit that can be upstreamed per year?
Yeah.
The second question. It looks like your net operating growth will rise quicker than your operating growth for the whole of NN. The net operating result will grow quicker than the pre-tax result because you've got corporate tax cuts coming in Netherlands, Belgium and Japan. I don't know whether all of these tax cuts will come through. I know they've been proposed. They should support net operating growth from now onwards, pretty much. Are there any other impacts that the proposed taxes will have, whether there's going to be any other impacts on life and pension sales, for example, in the future? Thank you.
Karen, I'll take the five-sixth question.
Yeah. Of course.
Because it's five-sixth.
That was an easy one.
Yeah, it's five-sixth of the net operating profits. That we're allowed to remit in any year. That's the constraint that the local legislation puts on us. I think in respect of the second question, it's very much a Delfin question, and it's probably best actually after this session, because I think it'd be crazy for any of us to pretend we understand the impact of the taxes. I'm sure Delfin, though, will be very, very good at giving that answer. Sorry?
On the product. On the sales of COLI products, if the taxes get reduced in Japan.
The taxes have been. If we look at Abenomics, then actually it's part of the strategy is to reduce the taxation rate in Japan. We've seen it come down over the last few years from about 34%, 35% to, at the moment, I think next year it's going to be about 28.5%. What we're not seeing is any impact at all on the small, medium-sized enterprises owners still wanting to basically purchase the COLI products as a way of protecting their interests and their legacy. We still see that same interest in the product.
Any further questions? One more follow-up question from Kunal.
Hi. Thank you. My question to Satish on the asset management. It looks like the current cost saving target alone would give the mid-single digit growth in the operating profit. You also mentioned that you are looking to grow your flagship products.
Where does that tie up? Am I missing something?
Secondly, it looks like the fee margin from proprietary AUM is very low. Versus the third party, is there anything going to be done to increase that or some column that will be helpful? Thank you.
Yep.
Thanks.
On the first question, on the mid-single digit target on the operating result. That, first of all, I think you've got to look at a combination of the top line and the expense impact. As I've shared, the expenses will be going after, also as part of the integration, and it'll be a net number after being able to also absorb the inflationary and regulatory pressure. That's one aspect of it. If you look at the top line, I think there's going to be two or three different aspects that will drive the top line. One is we will aim to grow the top line from a third-party perspective. That's one. Two, as you're well aware, from an industry standpoint, there are margin pressures, and we expect to see that coming along as well.
Three, what we also see is from a proprietary and affiliate book of business, there are some known outflows. For example, in the closed block that we have in Japan, for example, we know there'll be some outflows. It's a combination of all of those three. Broadly speaking, what you will see is you will see broadly flat or broadly stable top line as a result of those three or four different aspects, and going after the expense side as part of the integration and beyond. To your second question, I think the fee margin, the fee pressure will be ongoing. Whether it's looking at third party or the being able to manage the assets of the insurance company. I think it keeps us sharp as well as an asset manager. That fee margin pressure will continue.
Yes. It's the proprietary book, right? All right. Any final questions before we wrap up? No? All right. Well then, thank you very much, gentlemen. Thanks for all your questions. Then I would like to invite Lard onto the stage to wrap up the day and to take us through the key topics that were discussed. Lard, over to you.
Yes. I have another 144 slides for you. We're going to go through. No. First of all, yes, we have come to the end of the formal section of this day, ladies and gentlemen. I thoroughly enjoyed it. I hope you enjoyed it as well. It's a lot of information, I understand, that we've given to you. I hope the information is relevant to you, which allows you to contemplate, to think and to consume it, and internalize it. Then we'll more than happy to read all the reports that will come out in the coming days and weeks. Obviously, we'll follow up also in the road shows with the various investor groups. Maybe it's good to share some observations as I wrap up. As you hopefully have seen is we're really excited about the Delta Lloyd transaction.
At the time that we analyzed the transaction, the deal, and we went for it. As you know, we went at great length to go for it actively. We chose our partner in the consolidation in the Netherlands, and we have been able to transact it successfully, and we have now a platform that we believe in our home market will give us a great opportunity to extract a lot of synergetic value and to create a better combined business longer term, with a great platform and good reach to customers. We're very pleased with that.
Our objective was to give you an update not only on that, but also on the growth engines that we have in the international businesses, the asset management business, and the various components of the Dutch businesses, and how we're going to integrate the businesses of Delta Lloyd and NN in the Netherlands and Belgium. This morning, I gave you an overview of the strategy longer term and how the progress of the group, the journey that we are on for the last three and a half years, how we're progressing. Delfin and Jan-Hendrik talked about our approach to capital management and risk management. During the afternoon, you heard from all the leaders of the businesses themselves on how they operate their businesses. What are the key messages that I hope you'll take away from today's meeting?
Number one, we're committed to successfully integrating Delta Lloyd and extracting the synergies. Deliver the goods, as I said. This means being disciplined and executing our integration plans at each of our business units and at the head office functions, achieving the milestones and realizing the synergies that we foresee. During the various presentations today, we have explained how we're doing this, the timelines for achieving the objectives, the integration challenges that we face, and how we're dealing with them. This process will involve many changes which will have a large impact on the organization and our employees. We will implement those changes fairly and professionally with respect for all those involved. Remember, we're a values-driven firm. We're clear, we care, we commit, that's our mantra that we live by, not voluntarily suggestions, and also in this process to our employees.
At the end of the day, we want to bring together the best of our businesses and cultures to create a stronger and better company. Number two, we will continue to improve the performance of our businesses. At our Dutch units, we aim to further increase efficiency. These units will contribute the largest part of the planned cost saves that we announced today. The non-life business has our special attention as we intend to turn around its profitability. Earlier this afternoon, Leon van Riet set out the measures that we will be taking to reduce our combined ratio to 97% or below. We are sharpening our focus at the asset management business, building on our distinct investment capabilities. In Europe and in Japan, we will accelerate our profitable growth. Number three, we will use technology and innovation to transform our business model.
For us, this is all about improving the service to our customers, whether it be in the form of new and better products, easier distribution, or more effective communication. It is also about making our organization lighter on its feet, more agile, and our processes more efficient, flawless, and less expensive. David and Robin today gave some examples of the initiatives that we are implementing in the markets. Finally, we will continue to allocate capital rationally. We've always said this, and you have seen that we have stayed true to our word. We have expressed all this in medium-term financial targets that we have announced today, as well as our commitment to our dividend policy and our pledge to return excess capital to our shareholders unless we can deploy that capital in value-creating opportunities. I want to thank you for being here today.
We know that there is also other companies that have their investment markets days and their communication moments. We're very pleased that we had such a great turnout. We love to engage with you. We really enjoy the dialogue, the questions that you have for us. You make us think. We find that very important. You make us think continuously, and we learn from that because our aim is to learn from these discussions. We look forward to many fruitful discussions in the future. We want to thank you for your support. We want to thank you for your trust in NN Group over the past years, and we want to thank you again for being here. Also to all the people on the webcast, I would like to say thank you as well for your time at any time zone that you're at.
For our colleagues that have been watching this and have been helping to prepare this day on the webcast, we are here together. Thank you very much.
Thank you very much, Lard, for wrapping it up. Thank you all for being here today. Thanks also for those on the webcast for joining us today. Thanks again for all your questions.