Good morning, everyone, and welcome to Enen 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 Karen 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 Kunstolmuseum.
And I would now like to introduce our management board members. And let me start with Dorothee, who gave a very inspiring talk about how to connect purpose, people and performance. Thank you very much. And Lard Friese, our CEO.
Good morning, everybody.
And also Delfin Rueda, our CFO. Jan Henrik Rasmus, our Chief Risk Officer David Kniebe, CEO of Netherlands Altogether Insurance Robin Spencer of our International Businesses Satish Bapat, behind the pillar of NN Investment Partners and Leon, he is heading our Non Life business. Have I forgot any Board members? Michel, where are you? Michel of the Netherlands Life Business and Jan van Ootreff from our Belgium Business.
And I would now also like to introduce my Investor Relations team members. They're sitting in the back as a support. Welcome, Geraldine Barker. 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 Kummerg Ruben van der Holst, And I'm not sure, Gitte Salicram, 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 vanilla factory, and this is a historic monument. It's also 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.
And today, here, we are in the coffee factory. Both Enen and Delta Lloyd's also have long and rich histories going back some 200 years. And now we are embarking on a joint future. And 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.
And we will also talk about our continued sound capital management. Delfron will do that. Jan Hendrik will talk about how we manage risk for value. And then in the afternoon, we will also take you through all our businesses and their developments. We have a full program for today, 9 presentations altogether.
So we are keen to get started. All the presentations have been handed out to you. It's quite a lot of information there, about 140 pages altogether, but we hope that you will appreciate it. And there's also a detailed program in the front section of your book so that you can see where we are. And as you can see, we have scheduled ample time for Q and A.
So we will ask you to reserve your questions until then. And we've 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 don't eat into our breaks. And finally, just 2 practical points. If you've got any questions or you need any assistance, please ask Gita or anyone at the reception desk.
And I would ask you to please switch off your mobile phones for today. And then 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. So welcome, everybody. And also welcome to everybody on the webcast. Highly appreciate that you are there. I know it's not only investors, analysts and other stakeholders, but also our colleagues that are there to a certain extent.
So welcome, guys. It's good to have you here. Very good morning to all of you here in the Van Aelen 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 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. And 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 2 companies. So let us begin and move to Slide 2, 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 €350,000,000 by the end of 2020. And this will come from a combination of the synergy benefits of integrating Delta Lloyd into NN Group and the existing standalone programs that we're running at both companies prior to the acquisition.
In addition, we expect to achieve an annual earnings growth of 5% to 7% on average from 2017 onwards in the medium term. And 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% to 50% and excess capital that cannot be deployed in value creating opportunity will opportunities will be returned to shareholders. We expect to complete the integration of Delta Lloyd by 2020 and the legal mergers by 2019. So let's move to Slide number 3.
My presentation covers 4 themes. First, I will look briefly back at what we have achieved in the past 3.5 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.
So let's move to Slide number 4. A critical component of becoming a stand alone company was to establish our own identity and brand. We have clearly articulated our purpose, which is to help people secure their financial futures. And we have distinct values. We are clear.
We care. We commit. And 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. Now 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. And at the same time, there are clearly some areas that are performing below our expectations, such as the low profitability at Non Life and the lagging inflows at 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 NNIP 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. And 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 3 years 2014 to 2016, our net operating result has totaled €2,900,000,000 compared with the free cash flow generated of €3,200,000,000 So let's move to slide number 7. 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. And 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 €4,900,000,000 This strong cash generation has enabled us to distribute more than €2,300,000,000 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. So let's move to Slide number 8.
Let us now look at the robust financial position. Our cash capital at the holding company after redeeming the 575,000,000 senior notes a couple of weeks ago now stands at just over €1,200,000,000 so within the target range that we set of €500,000,000 to €1,500,000,000 Our financial leverage position is also satisfactory. The Notsoboro transaction and the November senior notes redemption have reduced the notional debt by €1,000,000,000 Now 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. But as the Delta Lloyd and N 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. So let us move to Slide 9.
Looking forward, we have defined the following priorities. Number 1, 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 2, 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 3, 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.
But it is also about making our organization more agile and our processes more efficient, flawless, less expensive. And our 4th priority is to continue to allocate capital rationally. So let me now go through these four priorities, starting with the integration of Delta Lloyd on Slide 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 and 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? And will it improve our customer proposition overall? Now we performed significant pre deal preparatory work over a long period of time before launching our bid for Delta Lloyd. And as a result, we were confident in our conclusion that this was indeed a transaction that would create value for our shareholders. Now 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. And 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 a 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 Aura direct channel and the Avian 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.
And in Belgium, we can transform from a mono distribution manufacturer to a multi channel, multi product number 4 market player. So let's turn to Slide 13. The financial benefits of the acquisition are compelling. We have deployed €2,400,000,000 of capital to acquire Delta Lloyd at an expected return of at least 10% on that capital. And part of the acquisition price was financed by €900,000,000 of senior debt, which we issued in May at attractive rates.
Now as you've seen from our recent quarterly results, the former Delta Lloyd entities are contributing to capital generation. And together with the future synergies to be realized, we expect this to translate into additional cash flows, free cash flows over time. And as announced at the time of the transaction, we anticipate a double digit increase in dividend per share for the year 2018. So let's move to slide number 14. From the start, we have aimed to drive the pace of integration of our 2 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 develop 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 have started extracting synergies where possible, finding quick wins, for example, stopping projects and contracts that are no longer necessary.
Now 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 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 envisage cost savings by the end of 2018. The integration of the Dutch Life and Non Life units is more complex and will be completed later in the timeline. But all in all, we expect a total €350,000,000 of cost saves to be realized by 2020. And finally, we aim to complete the legal mergers of the various entities by 2019 at the latest.
So let's turn now to the individual businesses, where we are committed to further improving operating performance and transforming the business model through innovation. So let's move to Slide 16. And 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 1st 9 months of 2017 by business unit and on the left you can see how much equity we have allocated to each of the units. Now as you can see the majority of our earnings comes from the Dutch units and even more now than before the acquisition as and this will remain to be the case as we turn around the profitability of the Non Life business.
We are a diversified group with a significant share of earnings coming from other European countries and from Japan. And it is mainly at these units and at our asset manager that we see further opportunities for growth. Now also please note that the segment Other, which includes our Banking business, is not shown in the pie charts, but the Banking business has reported a total operating result of €92,000,000 for the 1st 9 months of 2017. So 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. And with our strengthened market position, we are even better placed to capture growth opportunities in the pension area. Efficiency is key to managing the runoff of the closed blocks and Michel van Elk, our CEO of the 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, but 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. And 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.
And 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. So let's move to the next slide. Over the past few years, not the next slide yet, 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 tenure mortgage loans for the investment portfolio of the insurance
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 bancassurance partnerships, but also, for example, by upgrading the efficiency of agents through digitalization of sales and underwriting processes. And we aim to continue delivering an excellent customer service through innovative products and digitalized customer engagement. Robin Spencer, our colleague for international, will expand on these themes this afternoon.
And in Investment Partners is our asset manager, which together with Delta Lloyd Asset Management manages almost €250,000,000,000 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% to 10% by 2020. Now 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 Bhabhat 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 improved 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 6 Spark Labs 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 an end. 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 with the connection by the connection with relevant partners. For instance, in Hungary, we are currently partnering with Vodafone and a start up to develop a new service to help people with diabetes to better monitor their blood sugar levels. And 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.
So let's move on to our final priority, which is to continue to allocate capital rationally. Ennen 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. And 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. And obviously, all within the very disciplined framework that we have to assess all those opportunities if and when they arise. With that, 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's already our largest unit by gross written premium and by value of new business. NN 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 operating units operate businesses, earnings upside from the units that we are reshaping and exposure to growth. Our priority at the Dutch Light 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. And 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 3rd party assets to date this year. They're also a source of earnings diversification. And if we can allocate more capital to these high return growth areas, organically or inorganically, we would be keen to do so. So let's turn to Slide 24. We will continue to allocate capital rationally.
And 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.
And we are rigorous in this analysis. Does the plan achieve the hurdle rate that we acquire 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 and 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. So to sum up, we've made good progress on our journey as a standalone company over the past 3.5 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. And 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. I'll hand over to Karen. Thank you.
Thank you very much, Lard. We have a long Q and A session at the end of the morning, so I would ask you to save all your questions until then. And I would now like to invite Delphine onto the stage to talk to us about our continued sound capital management. Over to you, Nelphine.
Thank you very much, Karlyn, and good morning to everyone. My presentation today is going to be centered around 3 themes. 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 scope of the 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 and 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 20132016, and that compared with our target of 5% to 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 €200,000,000 almost half 1 year and a half earlier than initially envisaged.
I 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 overtime 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 2 39%, compared to 204% at the end of September this year.
Our operating capital generation during that period was approximately EUR 2,000,000,000 of which EUR 1,700,000,000 were the growth of own funds and around EUR 300,000,000 the decrease of solvency capital requirements. The operating capital generation includes the contribution from Delta Lloyd for 2 quarters for a total amount of EUR 110,000,000 Markets were quite volatile during this period of time. However, the overall impact of market variance resulted in a change of only 3 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 7 quarters, the typical quarter per quarter volatility disappears. Since the introduction of Solvency II, we distributed €1,100,000,000 to shareholders, representing €700,000,000 ordinary dividends and more than €400,000,000 of share buybacks we executed in 2016.
Comparing the €2,000,000,000 of operating capital generation with the €1,100,000,000 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. And with that, let me briefly remind you where we saw value acquiring Delta Lloyd. We see benefits from the Delta Lloyd transaction in 3 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. 2nd, 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 Dentaloid acquisition, cost synergies were estimated at €150,000,000 We have updated our estimate.
We aim now to reduce administrative expense based on the units in scope of the integration by a total of approximately $350,000,000 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 these expenses that these 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 1.5x 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. And to help you better track the underlying evolution of the total cost base, we will continue to present these costs separately as special items. Similar to our previous expense targets, this new expense reduction ambition will have to absorb upward cost pressure from, for example, from inflation and regulatory changes. Now 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 350,000,000 to come from Netherlands Life and 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 €350,000,000 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.
However, 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 Dentaloid Life. Furthermore, we see some benefits on the Onfon 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. However, 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 3 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 upstream to the holding company, where it becomes part of the 2nd pillar, cash capital. The cash capital is kept at the holding company to cover stress events and holding company cost. The 3rd 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 a strong levels despite upstreaming significant dividends to the group. NN Life, for example, has seen its ratio improve to 2 18% at the end of the Q3 this year, while it upstream a total of €1,400,000,000 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 EUR65 1,000,000 However, we expect this to increase as we integrate the businesses and extract the synergy benefits. 2nd, we can see in the last bullet on the right that after the intended merger of the NN Life and Dental Lloyd Life, the pro form a 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 form a some calculations based on the latest available solvency data.
So 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 1 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 1 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 allow us to inject it into our units at any time if that becomes necessary. At the end of the Q3, our pro form a cash capital position at the holding was €1,200,000,000 Our target range of cash capital is between €500,000,000 1,500,000,000 and this range is unchanged after the Deltaloid 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 3rd pillar of our capital management approach, where we show our debt maturity profile.
Our financial leverage in absolute terms currently stands at €6,100,000,000 We partly financed the acquisition of Delta Lloyd with additional leverage and have been able to offset this increase through the Nachspora 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 our overall cost 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 provide additional financial flexibility. The next maturity debt is EUR 300,000,000 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 Ennin Group. To start with, in our calculation of eligible Own Funds for the group, we exclude €1,300,000,000 of non available Own Funds. This represents capital that for one reason or another cannot be upstream 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 European businesses.
They are included in the local solvency ratios, but they are not yet available for distribution and therefore excluded from eligible owned funds at the group level. Additionally, we have €300,000,000 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 loan funds. Note that the regulatory capital of our banking business of around €900,000,000 is excluded from Own Funds. Our overall level of hybrid debt is at a comfortable level now.
And at the Q3 of 2017, we had around $800,000,000 of unused debt tiering capacity. Earlier in my presentation, I showed a 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 €1,100,000,000 This mainly driven by approximately €900,000,000 on 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 200,000,000 release of SCR, mostly from the runoff 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 order 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 40,000,000 a quarter, as well as special items related to non solvency II regulated entities from the Q3 2017.
The net capital flows in the 1st 9 months included 2017 interim dividend of €209,000,000 And 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. Now 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 on 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's just start with Netherlands Life, which has been a steady contributor to overall free cash flow. Remittances continue to be funded by a combination of on fund generation, largely through excess investment return and a reduction of required capital due to the runoff of individual life and pension back books. Also, 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 Life 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. But 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 needs 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 Japanese 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 Japanese GAAP profits, which in turn leads to lower remittances.
However, because the payback period of this product is approximately 5 years, we do expect that this will lead to increased remittances over time as the 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 2 years as the book runs off. We expect remittances of around €250,000,000 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 owned 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 by largely by Own Fund Generation 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 policy has our dividend policies has also remained unchanged. We have demonstrated discipline in adhering to our dividend policy by paying €2,300,000,000 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% to 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 the full of prior full year dividend per share. And 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 3 areas: earnings improvement, cost reductions and free cash flow generation.
This is reflected in an NN Group operating result growth target of 5% to 7% on average in the medium term. A €350,000,000 expense reduction by 2020 for the entities in the scope of the integration. And 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 €90,000,000 of private equity dividends and nonrecurring items in the 1st 9 months and incorporates Delta Lloyd only from the 1st 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 action to get actions to get there via combination of expense reductions and improving our underwriting results. In Europe and Japan, we expect to accelerate our earnings growth and so 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 and accelerated by the Delta Lloyd transaction have set a new cost savings target of €350,000,000 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 Karim.
Thank you very much, Delphine. We will now take a break for about 30 minutes. In the lounge, there will be coffee, tea, other refreshments, and we will call you back in time for the next presentation, which will be from Jan Hendrik and then followed by the Q and A session. And for those following the webcast, we will call you back at 5:10 CET sharp. All right.
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? And 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.
And then after that session, we will have our Q and A session where you can ask all your questions to Lars, Delphine 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. Then 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 and A, so 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 3 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 1 in 20 event. This means that we need to have enough capital and liquidity to recapitalize all entities after a 1 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 3rd 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 are 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 December last year, and these have landed broadly in line with our expectations. Immediately after completing the acquisition, we implemented our NN risk covenants and policies. Essentially, all the NN Group policies were in became applicable to the Delta Lloyd units after day 1.
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 2 companies. In terms of technology and systems, we need to balance speed, functionality, and of course, simplicity.
This means we will not try to go for best of breed everywhere, and 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, and we think that's certainly true for an integration project. As you probably know, NN Group uses a partial internal model, an approved partial internal model, I should say, or BIM, 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 risk capital is calculated using the standard formula for all entities. The combined requirements from our internal model and standard formula entities 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 combined to a total solvency capital requirement of €7,800,000,000 at the end of the Q3.
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 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 high yielding assets going forward. Now 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 NNIP mortgage fund. We have around €25,000,000,000 of mortgages on the balance sheet of our insurance companies. And 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 5 years that we see on our mortgage book, and 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 €5,400,000,000 in mortgages, corporate bonds, and real estate.
The defensive asset mix of Delta Lloyd at day 1 also allows for improvement in risk return and so far we have already sold $1,000,000,000 of Gavi's, which we're 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 an end by historic book yields and not current market yields.
There are 3 points I want you to take away from this slide. First, and as you can see in the chart, the risk profile of the group didn't materially change with the acquisition of Delta Lloyd. 2nd, longevity risk is the largest risk, followed by spread risk and equity risk. 3rd, 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 €100,000,000,000 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, 3 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 Statistic, 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 policyholders 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 1 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 €5,300,000,000 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'm pleased to announce today that NN Life recently completed its 1st longevity transaction. The transaction is a population based hedge with Hana Marie 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 €3,000,000,000 of liabilities. The capital treatment of this specific deal has been approved by the DNB and will result in a reduction in the longevity SER of the Netherlands Life Business by approximately €35,000,000 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. Now these haven't changed much since we first showed them to you at the Q2 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 disclose 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've 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 insurers 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 Q3 2017. The first scenario mimics the actual market movements we observed during the financial crisis of 2,008. 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 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. So what can we learn from these scenarios? Well, 1st, our Solvency II balance sheet is exposed to spread widening of core government bonds. 2nd, 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 2 0 4 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 €8,000,000,000 at year end 16 to just over €5,000,000,000 at the end of September this year.
As you know, we have an active hedge program in place hedge liability movements. Taken overall in the past 8 years, the hedge program has proven to be effective. As the book continues to run off, we expect NNRE in the Netherlands to upstream €250,000,000 by the end of 2019, plus or minus 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 Karen.
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. And I would now like to ask Lartan Delphine 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. And then can I please ask you to state your name and the name of your company? And then please a reminder, 2 questions each. We can come back for a second round, but we want to allow everyone the ability to raise their questions.
So I think so Oriane first, and then I'll get back to you, Nadeem. All right.
I am Van Veen, UBS. Two questions, if I may, on capital generation and capital deployment. On capital generation, if we look at the 1st 9 months of the year, from Slide B13, dollars 1 point 1,000,000,000 capital generation. At Delta Lloyd, it was $110,000,000 you said of that for 2 quarters. So if we annualize that, we're it looks like a run rate of about $1,500,000,000 So the question is, how do we think about that number on a basis?
Is there one offs that we need to adjust for? And obviously, as the cash or the expense savings are delivered, do they just fall through into that cash generation number? 2nd question is on capital deployment. So your solvency is back above 200. I forget the word you used, but you're comfortable with the gearing level.
You've got 5.75 percent of debt to pay down in the Q4. 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. So I'm just thinking, how do we think about capital deployment over and above dividends from here? And in particular, what are the key constraints?
Is there a gearing constraint or a solvency to constraint?
Good. 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. But I think we've got now the benefit of looking at what has happened over the last 7 quarters.
So since the introduction of Solvency II on the 1st January 2016, we saw EUR 2,000,000,000 of capital generation, EUR 1,700,000,000 coming from on fund generation and €300,000,000 approximately related to the reduction of SCR. So 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, what how much has been the surplus investment over that period of time. But you already have one reference of 7 quarters. Also in another slide, I show what was the capital generation on the last three quarters, which is more recent.
It only includes Delta Lloyd over a period of 2 quarters since Q2 of the year. And therefore, you can see, if you like, not on 1 quarter to another, that's why we also round the amounts to €2,000,000,000 But 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. One very important one one very important is the fact of the markets moving. So 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, so you will have that variation from 1 quarter to another. But 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 €6,100,000,000 of net debt is comfortable. I mentioned that the average cost of that debt is good as we manage to refinance part of that on the NN Group side in the recent past.
So that give us attractive cost of debt. We did earlier this week reduce our leverage by EUR 550,000,000 due to the maturity of the senior debt coming from the Delta Lloyd side. And indeed, the next normal possibility to reduce debt will come in 2020 when €200,000,000 of senior debt comes to maturity. We've got the financial flexibility in terms of the strong capital generation. So we could, in theory, reduce further the level of debt.
But at this point of time, we think that our capital structure also in terms of the leverage, which is around 12x is very strong. So we don't see any particular reason to add in the short term. Obviously, we will observe how things develop going forward. And 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. So 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. So the focus is on the integration. So we flagged that share buybacks is something that we will not initiate in the short term. So we have other priorities. But of course, 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. And obviously, the share buyback route is one that works very effectively for that purpose.
Over to Nadine with the glass.
Yes. Yes. This is Nadine van der Meulle 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? 2nd question is for Delfin.
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 ideally? And particularly, I'm asking in light of quite strong capital generation, which comfortably covers the dividend payout policy that you announced today. So to what extent how should we be thinking about that? Because you have a history of quite significant additional capital return beyond base dividend.
I can imagine you have your hands full with Delta Leuente at the moment. But how should we be thinking about that going forward?
Yes. So let me take the first question and then Delfin, the second
question, okay?
So on the growth, this afternoon, Robin is Spencer, who is 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. And 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 'seventeen with the 9 months 'fourteen, it's basically doubled our VNB in terms of profitable sales. And also, we have markedly improved the returns on many of the businesses. And he will actually go back to that particular slide on return on equity per unit that we also presented at the time of the IP of the time of 2015, and he will expand on that further. Now 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 and protection products.
And 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. And we always said that we believed that the moment that GDP growth would pick up, you would see growth coming back. And 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. And that is actually what you're seeing. And 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.
So 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, we take 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? And if we do not have the scale, do we see appropriate opportunity to build out the scale, either organically or inorganically? And we take our views. And if at a certain point in time we feel that we need to act, we act. And 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. So 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 stable strong business profile for the longer term.
Delphine?
Setting solvency to targets or ranges, and that's something that we have not done in the past. And the reason being is, as I mentioned in my presentation, is that we like to have maybe we emphasize more 2 elements. 1 is the importance on fungibility of capital. So not all solvency ratios means the same. So 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.
So that's one element that we emphasize. And the other is to make our decisions risk based. So 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 upholding, the €500,000,000 to €1,500,000,000 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 of 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 right issue. So 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 pink shirt.
Yes. Hi. Thank you very much. It's Farooq Hennie from Credit Suisse. Well, you gave a list of things that you're going to do on capital synergies.
And obviously, there were no numbers next to apart from the ones that you've achieved. But can you tell us, are those numbers going to be bigger than the 350? And within that, is the PIM really the biggest element? That seemed to be what you were saying, so I just wanted to clarify that. And the second question I have is, what is a 1 in 20 scenario?
I know it might be a sarcastic model, but what is a 1 in 20 sort of scenario for mortgage credit risk in the Netherlands?
That one?
You can cover the one in 2020. Yes. No. Indeed, in my presentation, I indicated the areas of future capital synergies. So we already have benefited from around $350,000,000 of capital benefits.
And going forward, indeed, the move of the Delta Lloyd Life and Delta Lloyd Non Life business into the Partial Internal Mobile is something that will 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. So 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. And I think in addition to that, there's going to be some improvement on the own funds as we capitalize some of the savings that we are incurring. So as expenses reduce, there will be also some potential positive impact on the per unit cost that will be capitalized upfront on their own funds.
One moment, Farooq, so that it helps, so the webcast can also follow it.
Apologies for pursuing, but I mean, do you think there's more than $350,000,000 to come from those things?
Well, I think I very explicitly say that we're prudent until this have been materialized, so we are not quantifying the amount of the capital synergies. But my key message was, let's be prudent with the capital synergies upfront. They will require some times to be generated.
Then on the 1 in 20?
The 1 in 20, thank you for the question. It's not a simple answer. That's unfortunate in a way. So conceptually, what it is, is that we use spreads in our models to value mortgages in the internal model. So we have to find out what will the 1 in 'twenty spread event be for mortgages.
And of course, we have all the macro drivers flowing into that. Maybe a better way to cover it is to say that the 1 in 20 is a joint 1 in 20. So it's across all the scenarios. So we tend to think more about 1 in 10 per risk type. And then those sensitivities we disclose, they are closer to 1 in 10s.
They're not exactly 1 in 10s, but then something like equities, I think 25% is close to a 1 in 10 event or closer. Property, I think 10% is closer to a 1 in 10 event. And so these things combined, you can obviously see the 1 in 200s from the standard formula. And in general, we find that our own 1 in 200s are a bit bigger than the ones implied by the standard formula. But then when they diversify, it's also a bit more of a realistic diversification that comes back, which gets us to that model.
And so 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.
Yes. So Robin van Rooke, Mediobanca. I think the reiteration of your free cash flow guidance is very helpful. But still, you have a component that's running off by 2020, the Japan Closed Block VA. And that, of course, of your total net operating results, that part of free cash flow will be lower than the previous 3 years.
But I'm still wondering if you're going to be able to plug that gap basically because it's not part of your operating results by 2020. So your free cash flow guidance, is that run off book basically a margin to that guidance? So or should we expect that maybe the dividends from the bank will come in by that time that will plug the hole? And I also understand that the re risking element will drive down your investment margin under IFRS, but will improve your capital generation. So I guess that's also something that will help bridging that gap.
So basically, my question in simple is the ending for 2020, does that guidance you think stand on a stand alone basis? That's the first question. And the second one also relates to future capital synergies. I mean, 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 NN life part and a loss on the Delta Lloyd Live part. But 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. Yes.
Yes. I suggest Jan Hendrik to
Wim and then
start with Albanian.
Yes. Thank you very much. I mean, it will 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 mid middle term. The short answer is yes. We feel confident.
There are a lot of different factors affecting. It's true that $250,000,000 of free cash flow is going to come from Japan Closed Block BA until 2019. So that means that we cannot rely on additional cash flows coming from Japan Closed Block BA. But what is true is additional cash flows coming from Japan Closed Block VA. But what is true is that we have additional growth and new business coming from Europe, coming Japan.
Also, the integration of Bentalloyd, by 2019, 2020, we will have already all the benefits coming from the reduction of operating expenses. And you mentioned, as you know, the bank and other considerations that will help generate that.
Most of those elements are also baked
One moment, Rob. I said otherwise
people won't follow it on the webcast.
I mean, most of those elements are also baked into that 5% to 7% operating result CAGR. So 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.
Yes, you're right. Most of it is included also within the operating result, but the bank is not. And also there are the behavior of the capital generation under Solvency II is different at IFRS. So 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 1st April.
So 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. So that means that when we've got the reinvestment of these assets, they provide under Solvency II significant more upside as well. So 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 allow us when and if required to use part of this surplus capital to support the free cash flow generation.
Yes. And thank you, Robin, for the question on assumption alignment and the PIM. When we published the joint accounts on the 17th August this year, we flagged assumption alignments in 3 areas. It was the investment expenses you've mentioned, longevity that we've discussed also in December and then also the valuation of mortgages. We really try to align all the assumptions in the base balance sheet already.
So 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 and NN has an approved partial internal model. So 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 in 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. And at the end of it, hopefully, we can also agree with our regulator that it is a sensible model to use and then start calculating the SER for the Daltaloid units in scope of the project also with our internal model.
Okay. Thank you for that. Gentlemen, Benoit Petrar?
Yes. Benoit Petrar from Kepler Cheuvreux. Thanks for the question. The first one is on M and A. Basically, in which country do you see opportunity or the need to grow?
And also more broadly in terms of long term strategy is there 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 kind of the Netherlands? That will be the first question. The second one is on the net the holding cash range, €500,000,000, 1,500,000,000 dollars Just want to make sure that the buffer you have at holding level, so the range includes basically buffer for potential macro shocks like end of QE, which is quite likely by the end of 2020?
Or do we need to add a potential buffer for volatility on the top of the 1.5? And also do we need to take into account maybe M and A buffer, something special there? Do you see any needs on that side? Then maybe the last one will be on the dividend from the bank.
Yes, maybe let's do the 2 and then we'll come back. Yes. Just to allow everyone a chance for questions.
Yes. So let me start with Yes, I'll start with the profile of the group and how that evolves in our view and any M and 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. And obviously, that has cemented been cemented even more right after the acquisition with Delphoid, which is largely a Dutch Benelux business. So that's number 1. And also moving forward, if you 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. But let's also agree that we aim to improve the Non Life business profitability in the Netherlands as well.
So I expect near term, the overall composition of the group in that sense from an earnings diversification profile not to change dramatically. Obviously, as we grow externally sorry, externally outside of the Netherlands, as we grow over time,
but it will be a
gradual process, you will see more contribution coming from the international area, the asset management area, etcetera, and it will become a more balanced picture. But I think near term, I think I was quite clear in it and certainly when we also aim to improve the profitability of the Non Life business. And when it comes to M and A, let's ground ourselves here. I mean, we've just completed in the Q2 quite a large transaction, right, and deployed $2,400,000,000 of capital. And I want to make sure that we deliver on the goods, that we get the synergies out and that we deliver on the goods.
So that's the first and foremost priority. What I aim to say about any other M and 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. And then it's largely bolt on acquisition. So we like 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. Now obviously, as if and when this comes, we have a very rigorous framework to assess these kinds of opportunities. And most importantly, our priority today is deliver the Delta Lloyd Synergetic benefits and execute.
On the range?
Yes. The cash capital out holding, this range of 0 point 5 to 1.5, Benoit, is basically trying to cover a shock of 1 in 20. 1 in 20 covers significant turbulence in the market or any other event that occurs. So how does that work? First, I mean, we assess, we run the scenarios of the different shocks that will happen in 1 in 'twenty.
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 get the capital from the holding company. And that is what we cover within this range. The actual calculation of this 1 in 20 shops, because keep in mind that our subsidiaries are well capitalized. Obviously, in a scenario of 1 in 20, the subsidiary that will be largest impacted is NN Life with a 2 18% or the Deloitte 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. And 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. So basically, the need to inject capital into this new entity will be lower in a shock of 1 in 2020.
Thank you. Michael van Maelk, and then I'll get to you, Patrick.
Mike van Maelk, Bank of America Merrill Lynch. So 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 Japanese 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 2,030.
So 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 their local businesses. I mean, 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 low 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.
Yes. Thanks.
So I think 2 questions. I see 2 questions there. Starting with the last one, which is maybe simpler or shorter. No, we do not see any particular need that 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 ourselves. In terms of the free cash flow versus the net operating result, You mentioned bank, but it's not only surplus capital. I mentioned before that in terms of the investment under the operating results. So as we basically on our large DAS investment portfolio, as we re risk, we've got some additional capital generation versus the one that you are you see reflected within the investment margin, within the IFRS investment margin. But 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. So 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, as you know, Robin will touch later. So 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. And 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 €2,000,000,000 when you include the movement of own funds and the reduction of the SCR and that compares with less than €1,900,000,000 of free cash flow that has come to the holding. So we already have a path.
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 allowed us to while at the same time we were paying to our shareholders $2,300,000,000 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 $2,400,000,000 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 track of UFR.
So there is quite a few elements, but altogether and in simple terms is what confirm us the ability to maintain this same guidance going forward.
Thank you. And then I'll go to Patrick here in the front.
Thank you. Well, 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. So 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 mean, 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.
But yes, well, have you seen any change? I mean, also connected to this, I mean, great, the reinsurance transaction, but €35,000,000 from a total capital of €5,300,000,000 is a sort of, I would say, dipping the toe in the water. Can you truly wait into it in the future? So what is your take on this?
Yes. So let me
So let me take the DME question?
Yes. I'll yes, let me start and then if Jan Hendrik wishes to expand, absolutely he can. So we have we deal with many regulators across the footprint. And of course, DNB is our group regulator. And DNB, we have 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 No, Ministry of Finance. Oh, the Ministry of Finance, yes, of course, the Ministry of Finance. And we, of course, have regular interaction with the cabinet and with members of the cabinet, also with the Minister of Finance.
But I hope you understand that we do not disclose any content of, let's say, what we discussed 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. I think we also 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.
So it's a bit more complicated. So yes, it's a start. I think we cannot say much more than that today. But 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 will go to Matthias and then I'll come to you, Johnny.
Yes. Thank you. Mathias Zwift from Kempen. Just two questions. First, if I could come back on the longevity hedge.
Is there next to the SER benefit, the risk margin benefit possible when you do such transactions? Sorry. And second question I had is on the re risking you announced today. Yes, you mentioned that it negatively impacts the IFRS investment margin because that's based on book yields for NN, but that is accretive to the Solvency II spread you generate. So 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?
And 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. So is there a big step up in capital requirements we should expect because of that re risk? There is also like the Tier 3 admissibility, which changes. So there are a lot of moving parts. So I just wonder if you could share some details there.
Should I may take the first and the third one? And then Delfin, you take the IFRS.
Yes. Let's for next time, let's limit to 2 questions, please, because we want there's a couple more people that want to raise questions.
So the first question is 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, which is a different 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. Then on the
SGR requirement.
SGR requirement,
I think you will not see a dramatic step up. It's not such a big difference that we will see. And 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.
So it's not like we take on one day SEK 10,000,000,000 of Gavi's and move it immediately to SEK 10,000,000,000 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 cap.
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. So there are other elements in play, but in general, I would expect a much more gradual evolution and nothing no surprises and no sudden big movements.
Thank you. And then on the dynamics of investment margin?
Yes. No, thank you, Matias. And 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. And it's good because I think sometimes the truth is somewhere in the middle.
And that's why we say that this approximately at the same level. And it's true. I mean, the dynamics, it really varies how what happens with your investment portfolio. So 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 been accounted for the market yield is reinvested at the market yield of the mortgage, nothing changes. So 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. So I think it's 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 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's not going to be neutral. It's going to be higher because you're replacing a market yield for the sake of argument of 1% versus the 2.5%. So this is an element that plays a role in our capital generation. And yes, I think I've said a note about this one, haven't I?
Thanks, Daphne. It's an important dynamic. Yes.
Johnny, I think, had the next question, and then I'll come over back to that side.
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. And 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 entity, the 2 entities. Can we assume then that the cash capital requirement of the holding would be at 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, Telstra.
Yes. No, they're good. I think you're right. And the answer is we link it to the IFRS operating result for simplicity. So we have introduced I mean, Solvency II has been introduced soon after we have gone public as an IPO.
And although first, the new regulatory regime was not fully known. And as a consequence, you need to find 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. But 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.
So 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. So 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. So 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 1 in 20 reduces. And as a consequence, that capital requirement after a 1 in 20 reduces. And indeed, currently, within that range of 0.5 to 1.5, when you add to 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 the in the low half.
Thank you, Delfin. And then I'll go to William Hawkins, and then I'll get to you, Claudia. Here, next to the pillar. Yes.
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, and you said if you're backtesting 2,008, 2011 scenarios, we'd see your ratio go up. I mean, at the very highest level, that worries me extremely. The real message from that is that the model is 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. So I'm just wondering how you guys respond to that kind of results. 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. But I mean, 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 center test.
Thank you, William. That's a very good question. Of course, we realize that financial crisis and sovereign crisis 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, and that is also what we go for here.
We have a very strong solvency ratio of 2 0 4 percentage points. We give you our sensitivities, and we give you the tolerances we live within. And 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.
So 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, so the spread widening of coverage, for example, We do essentially feel that, well, if you're in the German or the Dutch or the French sovereign, there is really a default issue coming there you are pretty far down the track. So it's not so we think our primary risk there is really the default risk and not the spread risk, as I have said. And 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, and that's sort of what you're picking up in that framework.
Thank you. And then you're in the middle, the lady. Yes. Thank you.
Claudia Gaspero from Barclays. So 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, but 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 is supportive. And it's also true that both solvency durations and solvency operating capital generation can become quite procyclical.
So can you give us a sense of how much the free cash flow generation can deviate from operating earnings in, say, the 3 stress scenarios that you present from a ratio perspective? Can you give us a sense of how big the difference can get?
Maybe I start and you follow with a bit. So when you look at the last 7 quarters, and I don't remember the number of the slide, but is the movement analysis of Solvency II since the time of the IPO. You're right, markets help us and we had approximately €1,000,000,000 of capital being generated. But this €1,000,000,000 was, as you like, compensated with approximately €1,000,000,000 of other factors coming into the in the segment in the column other, including the assumption changes that we did, for example, in the acquisition of Delta Lloyd. So that means that over that period of time, if you exclude markets, what you've got is $2,000,000,000 of operating capital generation compared to approximately $1,900,000,000 of free cash flow.
One caveat to make is that in the operating capital generation, we are not reflecting the approximately $40,000,000 of cost of the hybrid capital that is in the segment over. But very much in a period with a lot of volatility that has worked.
Yes. And I think the thing to say is that we really there's a lot of complexity and a lot of volatility. And if you zoom into things, it always gets more complicated. But at a simple level, we try to manage it for free cash flow and for remittances and to get that out. So we always try to think, is what's happening something that's changing the path over the longer period there?
Or is it something that is just noise and we should just keep going? And you have seen that we try to bring stability. So I think in these scenarios, if we look at it, we would not necessarily have to change that remittance pattern a lot. Of course, 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.
But 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, Stephen. JT?
Stephen JT here.
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. And I think from observation in times of stress, core sovereign bond spreads have always decreased. And so 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% to 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. And then secondly, even if we assume no increase in interest rates, the UFR strain is going to decline over time as the book runs off.
So, 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% to 7% over the intermediate term? And then 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? Yes. I thought
it was
You said one question.
One is the other question.
The second question is, when we look at NN Bank, we've expected meaningful cost synergies because it's just a very scalable platform. And so when we see the 10 percent cost reduction, are we right to understand that that's an absolute cost reduction in spite of significant continued growth in the bank, I. E. That the actual amount of cost cutting in synergy is much greater than 10%, but that's offset by organic growth in the bank over the next several years. Okay.
Thanks. So thank you, J. T. Maybe although it was not a question, if I may, I'd like to comment on the statement because I fully concur. I mean, 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 of move to safety because of the heavyweight of AAA government bonds. Yes, indeed, that is how it works. And it's also, I think, one element that Jan Hendrik mentioned in his presentation, which is although the when things are wrong goes, the market is nervous, equity markets decrease, but this is the moment of which the spreads on corporate bonds increases and this is a very natural hedge, as you know, in our solvency. So that's something that is good for us. On the growth of 5% to 7% and would be the free cash flow be higher than that?
I think is I would go to repeat a little bit myself. There are a few items that you have identified on the investment yield. And 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. So that's why also provide us certain free cash flow is defined as the remittances minus the holding cost. So 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.
So our best guidance would be not to go above the 5% to 7%, but to stay within the 5% to 7%. And 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 Edem Bank.
And then Stephen had a question. And then I'll get to you, Bart Jooras.
Stephen 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? And what time of year do you prefer to announce these things?
I'm thinking what quarterly results or full year results or something like that? Thank you very much.
Thank you. Thank you, Steve. I mean, we do prefer to announce good things when it is raining, so not in a sunny day, so 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, When we are basically looking and projecting what is the capital generation and the cash flows expected from the future, analyzing what opportunities exist, so 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.
And then, Bardois, yes, you had a question.
Bart Jooris Degroof Petercam. If we look at the sensitivities on the Solvency II ratio, we see that they have declined since the end of 2016. We're also now managing on a certain torrents 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? And then 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.
So you want to Yes.
I think the second question is probably for you and the first question for Jan Hendren. Yes.
I think the sensitivities are lower, And this is the first time we disclosed the tolerances. And this is the first time we disclose the tolerances. But of course, we always have somehow in our heads internally some limits or target tolerances that we work within. So it's not a dramatic change. It's more that we have now gotten these in a I think simplified them enough to be able to communicate them in an effective way.
But 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. So you shouldn't read too much into it, I would say.
Okay. And then the second question on the medium term guidance?
Yes. So medium term is not 10 years, is not 7 years, but is not intended as 2020. So it's basically an overtime guidance. Also, it does not apply for every specific year. And maybe just to note, I mentioned in my presentation that the 2017 base from which we start it has actually is been at a elevated level because on 2017, there has been compared to 2016, a significant growth.
And I mentioned around €90,000,000 of private equity and non recurrent items already happened for the first 3 quarters of the year. In any event, this is basically guidance over time from the base of the 2017 level, which we have not completed yet, but therefore, there is always some uncertainty. But it is a medium term guidance. Yes, Delta Lloyd has only been in 2017, reflected for 2 quarters so far and 3 quarters by the end of the year. So that's the other aspect to adjust.
Correct. Kunal, you had a question.
Hi. Thanks for taking my question. Kunal Zaveri from JPMorgan.
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 to ratio? If I remember correctly, you all had told that the solvency II ratio at 180%, 185%, which was mentioned some months back. You all are pretty comfortable with that as well and now at 204%, so it's significantly higher. Secondly, again on dividends, why is the guidance still the same at 40% to 50%?
Is it, you know, cognizant or the fact that in the future, if, you know, the payout ratio is at the moment lower, you all can do a buyback maybe sooner than later?
Thank you. Yes.
So I think yes, so let me do that last one and then Delfin takes the first one. So we said a 40% to 50% payout ratio. That's our payout ratio. But don't forget that we also have a commitment about excess cash that comes out over time. We're seeing 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.
So 40% to 50% for the as a payout guidance for the sustainable attractive ordinary dividends and then the commitment to assess excess capital and bring that back to shareholders all the time unless we can, of course, do a great and very attractive employee creating acquisition or something else.
How do we define excess capital? I mean, it's even more philosophical question than the previous one. We have not determined a particular target range and 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 of holding being within that range and how we look at our risk profile and the 1 in 2020. And that is what we take into account in an holistic view.
Thank you very much. Any final question before we break for lunch? There's a second round of questions from Farooq.
Yes. Really sorry to delay everybody's lunch. But can I ask a question I asked before in a different way? 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? Because it obviously has been volatile.
Yes. Of course, we look at that. It's not one that we disclose separately at the moment. It is in our sensitivities. Do we have the oil do we still have the oil sensitivities?
No, where'd you
get that?
No, but I can get back to you. I mean, to be honest, it's not how I think about this asset and I think it's very important to take you through that a little bit. These are very secure assets. I mean, they originated as strong LTVs in the Netherlands because I also showed up and said, well, these LTVs are very different from the U. K, for example.
But 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. I mean, we're talking single digit basis points for most of the years. So we don't see big problems coming through there. It is secured on properties. The portfolio is relatively high quality.
And I would say that we have an appetite to increase. We're not yet at a limit for where our mortgage appetite lies. So 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. So the sensitivities are, of course, affected a little bit by what the VOLA does in that scenario and other things. So it's not a simplistic thing that we can just cover.
But 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. And 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 bonds for sensitivity and our overall ratio.
All right. Well, thank you very much for all your interesting questions, and there were many. And 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. And then 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.
And 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? And then I would like to invite David onto the stage to talk to us about the Netherlands business. And then after David, there will be Leon and Michel on the Non Life and the Life businesses. Over to you, David.
Yes. Thank you, Karin. Well, very good to see all of you either today or quite a few of you last night. So I have 3 topics I would like to discuss. 1 is how have we been delivering so far on all of our results that we have committed to.
2 is how does the integrated platform or the integrated company, what does it look like? So the combination of NACHA and Nylon and Delta Lloyd and what opportunities does that create on the back of our strategy around digital, personal and relevant? And then 3, 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 €350,000,000 of expense savings. So let's start. Let's first start with the progress since IPO.
So for Netherlands Life, the target was broadly stable operating results, which were well on track. This is, of course, on the back of expense savings. We set a target of 10% to 15% expense reductions for the Life company. And so far, we have achieved 9%. And 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%. And we have the introduction of the PPI, the DC pension vehicle that we have in the Netherlands, and then has over €1,000,000,000 of assets now in this PPI vehicle. And good to note that also Delta Lloyd, via B Frank, has over 1,000,000,000 in assets. Now in a relatively new market, it means that the market share for in this PPI market is will be above onethree for the combination of NN and Delta Lloyd.
So 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. But there were a couple of more targets. First on growth, the D and A business actually performed well and grew around 20% average growth for the individual and the group income. And also, Non Life did well on the expenses.
There was a target of 8% to 12%. Target was set, and already Non Life has delivered 7% year to date. Now 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 100 and 3.
So let me just break that down for you. So despite a difficult quarter, the last quarter, we see that actually the D and A business is performing well, and we see a combined ratio in the range between 90% to 95%, which is performing well. Also, ORA, the Abenomro joint venture and ING are performing well. We see also there combined ratios that are in the low 90s. So the real problem is property and casualty, and we see this both on the retail side and on the commercial side.
Now 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, we've been seeing the market has been seeing high combined ratios, and we are no exception to that. So we had negative results on prior years coming through. Now we're taking a lot of action on this, and I will talk about that later. Then the bank. The bank has been already came up this morning.
The bank has been performing well across the board. We set a target of 7% or more. Well, 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. So year to date, the bank made €92,000,000 profit.
Also, what is important for the bank is that not only the bank result itself, but the bank also generated around €3,000,000,000 of mortgages for the insurance entities and NNIP, the investment partner fund. So that's an additional added value of our bank. Then expense reduction, we set a target of 700 or later, 685. And as you probably have seen, we're well on track to deliver that. And then last but not least, NPS, our Net Promoter Score.
And 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. And it means that now every month, we have more promoters in our company, and we see every month actually more promoters coming in. And that's something that is also a testament on the strategy that we launched around digital, personal and relevant, and we clearly see now that this is paying off. Now that's probably more than enough about the past. So let's look at how the company now looks in the combined form of Delta Lloyd and Natchez and Nederland.
Now let's start with the market positions. Now clearly, we have a market leading position, We're number 1 in pensions, both in D. C. And in defined benefit. We're the number 1 in individual life, very strong position in property and casualty and also the number 1 in D and A.
So from a market perspective, we clearly have a leading position. If you then look at our brand, now the brand, the National Nederland brand has the highest awareness in the Dutch market, as you can see on this graph. Now personally, I'm mostly interested actually in the top part, the top orange part, which is the brand preference. So what we see in the retail space, but especially in the SME space also is that NN has the highest brand preference in the Dutch market. Now this is very important today, but we are moving, as you know, more and more into the digital world.
And then we see that actually this brand strength becomes even more important. Then distribution. We're basically in all distribution channels. We're the number 1 in brokers. If you combine the 2 entities, so we're the number 1 broker player, we're also the number 1 in mandated agents.
And now we have with the addition of Ora, we also have one of the strongest direct brands. Ora, for those of you that don't know the company, Ora has been quite successful in selling property and casualty, so retail property and casualty and health care that is underwritten by Cezette. But it gives us a strong distribution brand on the direct side. Then last but not least, our customer database. We now have around 5,000,000 customers, so retail and SME in the combined company.
And this excludes actually all the customers that we have with either ING or Abinamro. And this basically also means that if you think about €5,000,000 in the context of the Netherlands, we should be able to practically touch every household in the Netherlands. And this is something that over time we will need to capitalize on. Now this is, of course, the internal view. Now if you talk about customers, let's take a look at how this platform looks from a customer perspective.
So when we're talking about these 5,000,000 customers, what propositions do we have? And I think this combination, if you look at all the propositions that we have towards customers, this is unique in the Dutch market. So let's start, for example, at the top with National Nederland, which is what we call where we have an omnichannel strategy. Now 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. And if you want, it also means that your broker is informed about what's happening and he can also play his role.
So 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. So there's clearly still a lot of customers that prefer doing their insurance business and pension business via a bank. And now we have with ING and Avinomro, we have the 2 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. So it has been successful in offering portals not only to the employer but also to the employee and has been attracting therefore also different target group of customers than typically NN and Delta Lloyd have been doing together. So the combination of all these propositions make us unique. And I think all of these companies also can stand on their own, but it also means that on the back of digital personal relevance, 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.
So let's look at the progress that we've made so far on digital, personal and relevant as we talked about in 2015. Now on the left hand side, you see the 4 major streams that we have been working on in the past 2 years. Now let me just give an example on so on relevant customer contact on relevant customer contact and data analytics. So 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.
So 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. Now 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. Now another example is distribution partnerships. So 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 them to their customers. And what we've seen is actually we're getting better and better at this.
We used to get around a 6.5, 6.7 score from brokers, and now it scores a 7.5. So 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. Now 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 mean, I'm not I don't want to criticize my own countrymen too much, but it is really, really difficult. And we've been getting to positive numbers. And also, we've been seeing that we're stabilizing, actually increased it a bit in the last in September. So 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 1 in the Dutch market, which I think is also a testament of the progress that we're making on the digital side.
Now clearly, adding Delta Lloyd strengthens the strategy because not only we get more customers, we get more scale, 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. So let's look at innovation. If you Lard already mentioned, so 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 e mail bots, around artificial intelligence. Basically, we're testing a lot, and we're failing, and we're starting again, and we're failing.
And basically, we're still testing a lot in the innovation space. Now let me give you one example that have we how this potentially works. So we have here the HAPI on the slide. Now HAPI is, I guess, Amsterdam slang for habertsje or as my daughter would say, BFF. But anyway, you're a good friend.
So if you borrow your friend's car, now obviously, if you damage it, the no claim of your friend will be impacted. So then you're not only damaging basically your friend's car, but now you've just damaged also your own relationship or your hobby. So 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. Now then, of course, the question is, is this now the new big business model that we expect for the Netherlands? Probably not.
But we're testing these concepts. Now 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 nachial Nalanda offering or to incorporate it in the ORA product offering or to offer it via ING or Abenammo as well. So 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. Now all of this is still very much at the Netherlands level. So then I think the question is also how do you translate this back to the business units that we are talking about?
So let's start with Life. So we are in pole position to win in D. C. We are the biggest player already in D. C.
The D. C. Market is rapidly developing. So big target, of course, for the life company is winning D. C.
And 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. Now obviously, there will be synergy benefits, we believe, in the defined benefits books that we'll be putting together. And 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 benefit from. Then 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.
Now I think the big question and Leon will talk about all the measures that we're taking. And I will mention some, but Leon will go into more detail. I think the big question is now, so why would we or why would you now believe that we will be able to bring this combined ratio further down? Because we've been saying this for a while, and you guys and I see some recognition over there. So why would you believe this?
Well, let me just and of course, I thought about this because I didn't get in this position by not delivering on promises,
I can
tell you that. So I've been thinking about it. So why would this now work in the coming period?
There's a
couple of reasons. So 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 to the €100,000,000 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. But expense savings is something that we control ourselves.
2, market dynamics have changed. I mean, what we have seen is that last year, the combined ratio in motor was around 114% in the Dutch market. Fire was 109. So 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 a period where we had higher fire claims, whether it was fire or weather related. And as we talked about before, we put a task force on it. And there will always be a certain amount of volatility in fire. But what we've seen, 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.
And we're now implementing a task force to see what prevention and other measures we can take to also improve the Delta Lloyd book. But it gives us certain amount of confidence that we've done it before because the NN portfolio is looking better now. And 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 €40,000,000 This was to deal with the prior year claims. And in the meantime, we have been re pricing and readjusting our risk to see that also the current book will perform better. Now 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. Now all of these measures together, also with a different mix of businesses, because we now have also Abenoma in here, we have ORA in here. So 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.
Then the bank. With the bank, the plan is to rapidly integrate Delta Lloyd Bank and NN Bank. We're optimistic that already January 1 is 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 costincome ratio, as already came up this morning. The banks are have a comparable business model.
So the costincome 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 National Nederland today actually come from NN Bank. And over twothree of all traffic that we see on our portal and our app is because of NN Bank.
So 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. And as already came up this morning, we now believe that the bank can self fund this 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 this growth, but over time, it will start paying dividends. And the overall target, of course, is to continue to have an ROE above 10%. Now I realize that I already shared a lot, so maybe a quick summary in between. So 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 5,000,000 customers and a very strong brand. And 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. So that's the plan for the coming years. That, of course, leaves one big question, which is around integration. So let me just go to integration.
So 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. And it's 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. So 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 an end 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. Now I can tell you this created a lot of clarity and speed from the beginning. Another principle was quick decision making. So Alain already talked about the speed at which we did the transactions, But also on day 1, we appointed executive management, Dorothee, for those of you who were there already talked to you about that. Within the 3 months after that, we appointed another 155 of our managers of the combined entities.
And we're optimistic that in the beginning of 2018, we will have the legal merger of NN Bank, of NNIP. We took a lot of quick decisions on stopping projects. So we've seen also significant benefits from stopping projects and combining procurement spend, leading already to the first savings that were shown. So clearly, quick decision making has been helping already to get going on getting to our expense savings. Another principle was best management best manager for the job.
So 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. And 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. Now 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. So 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 the wrong job or they were in integration and system and platforms and all the focus goes internally. So with my management team, we're really committed to we're going to be outside, we're going to be visible. So 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 corporation with us going forward.
We're very closely monitoring all the broker progress that we're making. So 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. Yes, and 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. Now 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. So in summary, we have some very clear integration principles, and we're sticking to this.
And I think so far, we are progressing well. Now of course, then there's what are the next steps. So for 'eighteen, we have a couple of milestones here. I can tell you, we have, of course, very detailed plans. So there's a lot more milestones, but we picked some of the more visible ones.
So one for 'eighteen is that we will rebrand the Delta Log products to NN. Already this year, 1,400,000 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 National Nylon. We will move all customers into one database where our customer analytics team can work on. And 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.
Now for 'nineteen and onwards, of course, there's more back end work also to be done. So the integration and legal merger for the Life and Unlife company is planned for 'nineteen. Further upgrades that we can do in our system, further rationalizing our system, 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. And of course, for the company, very important, as of 2019, a new collective labor agreement for the combined entity.
So many milestones that we have coming. Now when we're doing this, obviously, the plan is that we really want to build the leading company in the Netherlands. And we're not only want to build it by leading in terms of size, but also in terms of quality and best customer service. Now part of that is also that we need to be able to be very competitive towards our customers. And this is also how we got to the target of €350,000,000 of savings that we're planning on doing in the integration scope.
Now let me talk about the 350,000,000 because it is a obviously a big number. So 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 businesses involved in scope have delivered very detailed plans. And we went through many rounds of iterations on challenge, go back and forth and challenging on these plans. And all of those combined plans lead us to believe that we can do the €350,000,000 And William, I remember last night you were saying, yes, yes, yes, all these companies, they do it, and I never see the €350,000,000 back in the numbers. But here, the real plan is that you're going to see the €350,000,000 So you should be seeing end of 'sixteen to end of 2020, you should see it in the expense line of the integration scope.
Now we tried to group the savings into 4 pockets. Now one is clearly synergy. So 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. So there is clearly a synergy piece, which is contributing to the €350,000,000 Another piece is simplify.
We have quite complex landscapes in both companies, and this creates an opportunity to not only simplify within the NN or Delta Lloyd scope, but to simplify also across these 2 companies and move it to cloud. The third one, not necessarily related to integration, but it's variablizing expenses. So 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 costs, which also helps then in case portfolios are running off or are increasing that we don't get stuck with fixed costs. And then the individual life company has already taken steps in this area, and there's more planned here. And the last one, of course, is digital.
Now digital helps, of course, to create more customer satisfaction. But 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. Now 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 'sixteen to the end of 'twenty with significant remittances.
And 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 remittance is broadly in line with the operating results. And Leon will later on talk about this. Then the bank. So for the bank, we aim for at least a 10% cost saving on the combined entity and, of course, a rapid integration of the bank.
Now the bank team has done this before. For those of you who remember, we had Westland Utrecht, Hypotec Bank, which was a mortgage bank from ING that came out of ING and came to NN. So we have already merged Vejuha with the NN Bank. And this team has done the integration before, and 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 which will have a downward pressure on margins. Also mortgages in general, there is some pressure on 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 the for NN Bank. And of course, important that the bank can now self fund its growth going forward, and we expect over time to the bank also to start contributing to dividends.
That brings me to the end of my presentation. So going back to key messages. So one is we really want to leverage on our leading position in the Netherlands and our strategy around digital, personal and relevant. We'll be supporting that because it also enables us then to drive and improve our operating results and our cash generation. And last but not least, we are delivering on the integration plans, and we're well on track to deliver.
And of course, we have still a strong target to deliver on for €350,000,000 of savings by the end of 2020, but we're well on track to deliver that. So that's I will leave it for now. I will be back for Q and A, which I'm sure you will have. And now let me give the floor to Leon Van Riet, who will talk about our Non Life business in the Netherlands. Thank you.
Yes. 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 Thorried, 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. And in that period, I worked for 8 years as Head of IT of Delta Lloyd Group. I worked for 6 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. And secondly, I would like to lay out our plans for the integration of DeltaLog Non Life. In the 3rd part of my presentation, I will go through our plans for structural improvement of our P and C business. Now let's dive in and start this introduction of the Non Life company. With the acquisition of Delphyloid, 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 and A, the disability and accident markets, both in group and individual D and A. We are now number 2 player in the P and C markets, and we have a multilabel distribution of health insurances via our partner Ceesette, which is one of the top 3 health insurance companies in the Netherlands. And as David mentioned earlier, we offer many innovative solutions in the P and C business via our innovation lab called SparkLab and via Ora. As you can see, we are a well positioned company with many strengths, but we also recognize that the step change is needed to improve our combined ratio, especially in the P and C business. We have detailed plans to reduce costs and further develop our underwriting skills, and I'm confident that we will achieve the target combined ratio of 97% or below.
Now 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 €3,000,000,000 Together, the combined business is number 1 in the D and A market with a market share of around 28%. We are well positioned as 2 in the P and C market with a market share of 22%. In total, we serve 3,500,000 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 over the field award winning products, for example, on the legal protection products 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 markets.
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 and C business, with the most significant product lines being fire and motor. About onethree of our business consists of DNA 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 distribution of direct distribution of insurances. We have highly recognized brands. Our main brand, NN, is used for omni channel distribution. The Movi 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 DNA company in the Netherlands for 7 years in a row.
The Oergan brand is used for direct sales of P and C and health insurances. For the bank channel, we have access to 2 strong brands, ING and ABN AMRO. So 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 through 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. So 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 4 levers. The first lever is around people.
To make the integration successful, we want to maintain and combine 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, and we have an intensive engagement program to maintain our key people. In terms of our product sheet, 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, the features of Delta Lloyd products.
A good example is the Delta Lloyd Algae Culture product, which is added to the NN SME P and C products. The 3rd 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. So 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 3 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 and as a result of that we continue organizing these sessions with the brokers but most important of all we haven't lost any broker business due to the acquisition of Delta Light. Then around customer satisfaction, despite we are going through complex process of integrating, we also continue to improve our digital footprint and our customer service. And since the Delta Lloyd acquisition, our customer satisfaction is increasing.
Now moving to Slide 7. 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 and 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, only 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 Ora Health product.
All of this will be done in close cooperation with our partner Cessette. We will launch the 1st 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 2 important business lines P&C Retail and Group DNA.
Also the legal merger of the 2 companies will be completed in the beginning of 19. We aim to complete the integration in 2020 with the integration of our largest and most important business line P and C SME and with the simplification of our IT landscape resulting in a reduction of 25 IT systems. Now let me move on to our plans to improve the performance of our P and C business, the 3rd 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 4 years. As you can see, about half of our business is performing well.
The Disability and Excellence business has been running at good combined ratios of approximately 90% to 95% over the past 4 years. Also, the franchises ING, Aurora and Ambienamo Insurance are performing well with combined ratios of around 95% over the past few years. Our P and C business on the other hand, in particular Fire and Motor, both within SME and Retail, have showed 2 high combined ratios. The reason for this is in 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 solid roadmap to improve the P and C results, and I will take you through in detail in a couple of slides.
But first, let me turn to our D and A business on the next slide. As I mentioned on the previous slide, our D and 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 Q3 of this year. However, on average, the business of D and A has performed around 2% 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.
And by combining these two books, we reduced our cost base and we optimized our customer service. And we also further optimized the reintegration process, which is vital for the D and A business. We see some opportunities to further improve our DNA organization by rationalizing IT systems and removing overlap as we integrate the NN and Delta Way 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 markets where we have plans to launch a new individual disability product in the course of next year. Now let's go for the strong franchises of Ora, ABN AMRO and ING Insurance on the next slide.
First, I would like to illustrate ORA. The sole position of ORA is based on a strong online proposition, low cost operation, highly rewarded products and for the direct business and also its customer service is well regarded. This unique combination has been driving the success of Ora, and we will continue doing so. The second franchise is Abidemo Insurance. This franchise is a joint venture with Abidemo Bank, and 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 Abilamo Insurance in the direct and online channels via Ablenero Bank. The 3rd franchise, ING Insurance. We have had a 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, and we will leverage on this.
Now let's move to the next slide. As I presented before, a step change is needed to improve our performance in the P and C business. The historical underperformance of P and 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% to 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 3rd quarter combined ratio for P and C this year was around 101%, which is the lowest level since the end of 2015.
Now I want I would like to dive deeper into 2 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 and C retail portfolio, which has resulted in an improvement of our combined ratio with 21% points only in 9 months because the outsourcing started 1st January this year. This improvement is driven by a combination of cost reduction in underwriting operations in 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, is on the slide on this slide is the turnaround of the NN SME Fire portfolio. A range of measures delivered a 15% point 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 and 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 and 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 and C business. Many of these actions are being implemented before the end of Q1 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. 1st, we've decided to rationalize structurally underperforming portfolios such as the Delta Lloyd Garage Portfolio and the Delta Lloyd Construction OR Risk Portfolio.
With NN, 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 Light Fire portfolio in order to improve results. The IT solutions that we are implementing will reduce, of course, our cost ratio. But 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 to 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 3 years. The remaining IT systems will have a higher level of online and straight through processing, which is also driving cost reduction. We will optimize our processes and standardize our products, and 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 3 year roadmap for improvement forms an important direction for our Non Life business and Non Life organization.
It will result in 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, given the qualities within Animal Life and our strong footprint, I'm confident it's feasible. Now moving to my last slide to summarize the 3 key takeaways are: 1st, as market leader, we are able to leverage our strong footprint secondly, we have solid plans for integration of Delta Lloyd's Non Life resulting in a simpler, more agile, efficient organization resulting in a cost reduction of 20%. And last but not least, we have a clear roadmap to bring the combined ratio back to 97% or below.
Thank you for your attention, and I would like to hand over to my colleague, Michel van Elke.
Thank you very much, Leon. Good afternoon, ladies and gentlemen. My name is Michel van Ael, and I am the CEO of the Netherlands Life Business. I have 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.
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we look at this combination, we are the number one life and pension insurer in the Netherlands, a position we are proud of. And 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 €114,000,000,000 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 runoff of the closed books, they will provide us with significant cash generation going forward, and it allows us to capture the growth opportunities in the changing Dutch pension markets, and it will accommodate 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 2 18% for NN Life and delteroid 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 LN Group. Upstreaming a total of €2,200,000,000 since the IPO and paying a regular dividend since early 2015. If we 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 €700,000,000 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. And we have reduced the risk profile of our book via shifting old guaranteed pension products to better hedgeable alternatives and move customers to D. C. And 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 runoff 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. And looking forward, it therefore remains our target to keep the operating results 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. And it's a market only partly aimed at traditional insurance clients, but its main focus is on company pension funds.
With total assets under management of approximately 200,000,000 euros our APF, De Nationale, achieved a 10% market share at the end of the 3rd quarter. But if we look at the number of signed contracts up to date, we expect that our APF will be around the €1,000,000,000 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 5,000,000 customers via 813 intermediaries, for which we cover 77% of the Dutch broker landscape. But probably more importantly, we do business with 99% of the top 250 advisers in the Netherlands.
And we offer our pension services to over 17,000 employers. But I think it's important to note that we are not only the number 1 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 favored pension provider by the intermediary channel already for the 5th year in a row. So the combined force makes us the market leader in the Dutch group pension market. And 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. But why is DC an attractive business? The business is capital light, particularly in the accumulation phase, which is 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 NL Life and even 75% for Delta Lloyd Live. And 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 D. C.
So it will be the coming service in D. C, The past liabilities will stay in DB. And 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. And through our increased scale following the Delta Lloyd acquisition, we are much better placed to drive expenses down.
In the Netherlands, we are in the midst of a discussion on the future pension reform, and 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 box 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 €1,400,000,000,000 in assets and over €32,000,000,000 in recurring premium. It's important to note that although only part of this market is accessible for the life company and BFrank, our PPI, and in 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, NNIP, our asset manager and AZL, our pension administrator, offer their services also to these pension funds. The Life company, and be frank, 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.
And 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 have set ourselves a number of objectives. Since the completion of the transaction, we have 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 1. The business has already been reorganized in closed books for pension and individual life on the one hand, 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 are now steadily moving or continuing our move in the execution phase to deliver on the targets we've set. We're fully 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. However, 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 dialogue 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, the strong desire of the intermediary channel because also for the 6th year in a row, we would like to be the most favored company by the intermediaries.
So 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. And 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 end 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 3 years. The individual Life team already is firmly in the execution phase of this.
The first three out of 10 systems want to have shut down in 2018 already, followed by another 3 systems in 2019. We expect 8 out of the 10 plant migrations to be completed in 2020. Now the next slide will give you a little bit more color on our expense reduction. Both NN and Delta Lloyd have been successfully reducing expenses over the past years and have been progressing on their stand alone cost reduction programs. Combining the 2 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 3 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 2 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 stand alone plans, amongst others from lower project spend, expanding the use of robotics, we now have 10 robots live in the NN legacy environment, but also increasing our straight through processing in the target system environment. 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. So combining these businesses give us great opportunities.
However, integrating 2 substantial life companies is not an easy thing to do, and it does come with its challenges. We need to integrate 2 large workforces in which we want to keep the best of both worlds. We need to combine the rigor and thoroughness of NN 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 are also dealing with a workforce which is structurally declining over time. And in order to keep staff morale high, we have created a clear vision which our people can rally behind.
We are the largest, but 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. And 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. But 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 patient side. At the same time, we have an ambition to further improve our client servicing.
If we look at NLife, 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 minus 32 in 2011, and we are now at plus 2 in 2017, despite the expense reductions. But 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.
So we've got many migrations ahead of us, and migrations mean challenge. However, we have confidence because we already migrated over the last couple of years over half a 1000000 policies both on the NN side as well as on the Delta Lloyd side. So we've got a successful track record we can build on. Now let's have a look on how we can drive value through optimizing risk return on our investment portfolios. Since the IPO, Enelife has been optimizing the balance sheet by investing in higher yielding assets.
We've invested a total of €8,000,000,000 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 a 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, but nevertheless it's important, so I'll say it again.
The sale of these government bonds may have a negative impact on the IFRS investment margin going forward. However, it will support the Solvency II capital generation and consequently the free cash flow generation. Now let's 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 runoff of these portfolios.
We expect the SCR to reduce by €1,500,000,000 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 runoff pattern you see on the slide assumes the portfolio develop in line with our best estimate assumptions and 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. But the release of this SCR will continue to support our remittances to Allian Group. So in short, we are the number one 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 4 key drivers to create value and generate cash going forward.
We have a proven track record in reducing expenses and 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 to close books and as such provide a predictable capital release as these portfolios run off. And 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. And with that, I would like to hand it over to Karen.
Thank you very
much.
Thank you very much, Michel, and Now I'm sure you've got loads of questions for David, but I'd ask you to save those for later because we have a Q and A session later in the And moving on to our asset manager, I would like to invite Satish Babat onto the stage and share with us the insights on the distinctive capabilities of our Asset Management business. Over to you, Satish.
Thank you, Karen, and good afternoon all in the room here, but also on the webcast. Let me start off by introducing myself. My name is Satish Bharpat. 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, so 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 EUR244,000,000,000 of assets that generate a little under EUR 500,000,000 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 2 businesses of NNIP and of TLAM and we expect to be substantially complete by the middle of 2018.
We also expect the resulting cost synergies to be around 5% to 10% of the 2016 combined cost base of the 2 businesses and that we expect these to be realized by 2020. Now this is a picture of our combined businesses, both of NN and DLAN. What you see on the left hand side is 2 pie charts, where you see the 3rd party assets are roughly a third of our total assets that we manage, but they contribute over 60% of our revenues. Of the 3rd party assets and the revenues we get from that, roughly 2 thirds of those revenues come from retail channels, the remaining from institutional channels. On the right hand side, you see 2 pie charts.
And these charts, we have split the AUM and the fees and the revenues by asset class. And 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 €50,000,000,000 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 €9,000,000,000 to our capabilities. Corporate loan portfolio of approximately €2,000,000,000 The 2 combined, we have been able to add to our total alternative credit offering. European Small and Mid Cap has been added to our European Equity capability, roughly €1,000,000,000 And we have been able to further expand our ESG, environmental, social and governance capabilities by roughly €2,500,000,000 Now we can absorb all of this scale at very limited additional cost.
And how do we do that? 3 key ways of doing it. 1, 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. 2, by merging the funds of Delta Lloyd Asset Management onto the NN into the NN funds, both here in the Netherlands and in Luxembourg and 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 4 different ways. The first is we manage the underlying assets of our insurance businesses. 2nd, 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 3rd party space. Number 3, we are able to attract 3rd party assets.
This year, we have seen a strong net inflow of approximately €5,000,000,000 for the 1st 9 months year to date. A majority of the flows this year have come from our strong flagship capabilities, emerging market debt and multi asset. We aim to keep up this momentum, while at the same time focusing on the quality of the flows. The 4th item and the 4th 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 €90,000,000 on an annual basis over the past 3 years.
We have a strong ROE, again, around 25% over the past 3 years. Our 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 domicile funds, and they have over the last number of years built an AUM base of approximately €4,000,000,000 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 results, the first results are coming in as we speak. Now you will recognize a number of these trends impacting the asset management industry. Let me walk you through all 4 of them.
The first one, low rates leads clients to search for yield and absolute return type strategies. 2nd, 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.
And 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. So 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 €7,000,000,000 in ESG strategies. Of our total AUM, we have over €50,000,000,000 in ESG integrated into our investment processes. At the same time, we are looking at reducing complexity.
We're 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 analysis and what I would like to call a combination of man and machine, human creativity along with machine rigor. We have this 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-twenty 18, ahead of our original timetable and schedule. Some of the key steps that we have accomplished to date. 1, we made key people, product and system decisions very early in the process. 2nd, we obtained approval what's called the DNO, a declaration of no objection from our regulator, the Dutch Central 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, quarter and a half, we are focusing on 3 distinct steps. 1 is we'll merge all of the Lux funds of Delta Lloyd into an N's fund range. This will happen in December, next week actually. 2nd, in Q1 of 2018, we'll migrate the back office processes onto enhanced back office platform of Symcorp Dimension. And number 3, we will merge the 2 businesses.
The legal merger will take place on the 1st Jan, 2018. Now after we complete the integration of the 2 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 2 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, but we have been able to anticipate challenges and have taken appropriate steps to address them. And 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. And 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. And post day 1, 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-twenty 18 and will extract the full cost synergies by 2020. Many thanks for your time. And let me hand you back to Karen.
Thank you very much, Satish. We will now have another short break and 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
for
All right. Welcome back. And can I ask you once again to switch off your mobile phones and get ready for our international units? As 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. And then after Robin, we will have a presentation from Jan Van Ooutreven on the Belgium business and then the Q and A.
So Robin, first, over to you.
Good afternoon, everyone. So being positioned at the back end of the day, some might consider us the tail end Charlie's. But actually, there's a some of you may know I like my rugby. And there's a guy called Eddie Jones. He's the coach of England.
And he calls the guys who come on, some people call them reserves, he likes to call them the finishers. So today, I mean, you should consider Jan and I the finishers. So 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 3 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 will continue to broaden our distribution reach, particularly through our agents and bank assurance partnerships. As 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 2 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. So 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 4 key priorities we have 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 the Bell 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 2 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've 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 1st 9 months of the year, this growth has been equated 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.
But 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 policyholders, 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 £367,000,000 in international versus the same period 3 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 percent to £248,000,000 over this 3 year period.
Our net remittances are up 35 percent to £257,000,000 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 3rd quarter. Now 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. So 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 4 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'll be leveraging the benefits of the acquisition, namely greater scale and broader distribution, to materially improve this. Jan van Ooutreib, our CEO in Belgium, will provide details later. The other 2 entities with 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're generating good VNB margins, in particular towards Protection Business where margins remain healthy and where we're 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 7 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 products excuse me, This will be accelerated through conversion projects and increasing the new business of capital light, higher return projects products. We are starting to experience signs of recovery and increased growth in many of our chosen European markets and we'll 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 BNB and IFRS operating results. This is profitable business that pays back on average in 5 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 3 charts. We generated £146,000,000 of VNB in the 1st 9 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 2. 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 2 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 2 dominant distribution channels in Europe, banks and Tide 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 twothree 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 Tide Agents. NN is known for having high quality sales forces across our markets where personal relationships still really matter. These long standing relationships with our clients is the true power of our NN Tide agent network as our customers continue to value professional advice relating to pension savings and life products. Our vision is to transform our Tide 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 2 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 have entered into 14 new bank relationships, including 1 megabank, Mitsuho. 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 8 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 3rd 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 5 international markets.
The objective of the Spark Labs is to work on new and disruptive thinking where we can experiment with new ideas and test and test and learn quickly. Each of our international Spark Labs focuses on a different theme. For example, our Spark Lab 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, hesakkurdukot.com. Yes, easy for me to say.
Hesapkurdukot.com.
This exclusive partnership with this fintech gives us the opportunity to connect and engage with their 2,000,000 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. However, 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 sales force 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 light 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 4 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 Outreve, the Belgium CEO, who will cover off the progress that we're making with the integration of Delta Lloyd. Thank you. Thank you, Dan.
Good afternoon, ladies and gentlemen. I'm Jan Van Oertreeve. I'm heading the Belgium Insurance Activities of NN, and I started this role as of July last year. Now 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. Now in the next 10 to 15 minutes, I will show you that the combination of the live activities of an NN 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. And 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 Belgian markets.
I would 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 4th 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 Linked segment, and we have a significant footprint in the Life Protection segment with a market share of above 19%.
Now the Belgian team is dedicated to providing excellent service to our 1,400,000 customers. And if you know that in Belgium, we have a population of around 11,000,000 people, approximately 4,000,000 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 multichannel distribution network to reach our customers. And in fact, we achieved diversification and broadening of our distribution by combining on the one hand the bank channel of Renen, and on the other hand the broker channel of Datadloyd. And it's important to note that both the businesses in Belgium are very complementary.
And by combining them, we're well positioned to grow in Life Protection and Unit Linked. And 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. And this awareness is driven by a decreasing Belgium 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. And 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 €1,000 for an employee and even below half of that for a self employed person. Now it's clear that those pensions will not guarantee sufficient purchasing power at the age of retirement. And on top of that, it will be very difficult for the Belgium government to increase these state pensions as the cost of the current pension system will only rise due to an aging population.
Now 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. And we want to maintain this footprint by investing in our underwriting processes or pricing processes and improved client experience as well as in product innovation. We will bring our products to the market to the bank and the broker channel, which are also the 2 dominant channels in Belgium, and we will continue to invest in the further development
of both.
Now let me explain how we want to manage the integration process in Belgium. Our plan has been designed to move as quick as possible to 1 company. And let me explain what I mean with 1 company. One brand, one streamlined product offering, 1 organization, 1 leadership team, one legal entity and one location. And 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. And as a result, we aim to reduce our cost base by approximately 15% to 20% by 2020. Because the decommissioning of the IT systems is a step by step process, we expect that overall cost synergies will be slightly back end loaded as you can see on the slide. Now 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. And it all starts with our people.
Keeping our people, our staff motivated during the whole process will be key. And therefore, we communicated clearly from the beginning to our people what they could expect in terms of timing and process. We quickly assigned the leadership team, and we made an early decision to move to the Dell Telroyd office. On the distribution side, we now need to manage 2 channels, the broker channel and the bank channel, 2 channels with different needs and different demands. And 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, and I think that the IT part of the integration will be a very challenging part. But in order to manage it successfully, we have defined some integration principles. 1st integrate, then upgrade, and in general, the NN IT infrastructure and the NN systems will be leading. And by applying those principles, we can mitigate having time and money consuming discussions, and we ensure to keep the integration pace. Now how are we going to be 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. And the graph on the left shows the product mix of our current sales. And 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. Now 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%, 80% by 2020. And this will have a significant impact on the VNB and therefore the capital generation of the combined entity. Now 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.
So here it's more a question of maintaining those partnerships. We're well known for our life protection solutions and our competitive pricing. And 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. But 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. And 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. And 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.
Now going forward, we expect that the capital release coming from the unwinding will be offset by the capital strain from the new profitable business. So therefore, in order to improve further our SCR, we are looking into management actions to accelerate the unwinding of this traditional savings book. And 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.
We will continue to focus on the profitable new sales coming from Life Protection and Unit Linked. And 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 Karen.
Thank you very much, Jan, and also thanks to Robin. That concludes our presentations on the business units. And I would now like to go to the 2nd round of Q and As and therefore invite David, Robin and Satish onto the stage to answer your questions. And as a reminder, if you do have a question, please raise your hands, wait for the microphone, state your name and also please limit yourself to 2 questions each, so that others also have the opportunity to raise their questions. And I already see a first question here from Hor Klaus.
Yes. Corflaj, ABN AMRO. Two questions. First of all, about the non live business, especially focused on the high combined ratios. 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 the last quarter? And how you wanted to solve that? 2nd question is about 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 Japanese life operations? Because it's not very clear from an obviously 2 framework point of view. So 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.
Thank you. Pretty clear, who
answers them?
Yes. Thanks, Cor. Yes, on non Life, so on the distribution mix, well, probably not very surprising. So we see the direct channel with ORA doing well. Also, we see both banks, Habenhamo and ING, doing well.
Within the broker portfolio and the mandated portfolio, we've seen through in the last 2 years, different patterns. So 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, on the D and A business has been doing well.
So specifically, I think on the Property and Casualty side, there we have challenges with the broker channel. But it's actually both on the broker and the mandated agents.
And on the I think on the Japan side, thanks for the question. Look, I think I gave you an indication of the sort of profitability, the inherent profitability of the products in terms of the payback periods and the growth that we're seeing in the overall the in force 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, but the way I think about it is actually quite simply related to the value of new business. The value our value of new business measure is economic measure that is meant to represent the value that we are creating each year. So really, if we look at the 9 months to sort of end of September 'seventeen on Page H4, you can see to this point, GBP 146,000,000 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 sort of the economic measures like embedded value, you would see the over the last few years, as the business has been growing, selling more and more protection business with the sort of returns that I've been suggesting that I told you about earlier, that actually the value of that business has been been rising over time. And now obviously, we need to see we expect to see that coming through in remittances. But again, that's going to be over time because in the short term, it's going to be offset by the sort of the drag of the new business strength.
Okay. I saw a question here first from Benoit, and then we'll get back to that side of the room.
Benoit Petrarque from Kepler Cheuvreux. A 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 a 19% return on equity. It's just the €35,000,000 adding up to the figure.
You get more transfers from vessels, but still I think, so still volumes to come. But I'm a bit puzzled by the kind of 10% return on equity plus targets. It's not really ambitious and quite far from current levels. So 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?
Okay. Yes, thanks. The yes, indeed, there is they're offsetting things here, and there is some downward pressure that we expect. I think on the value high, the Western Utrecht portfolio that we got from ING, out of the €3,000,000,000 we still have €1,500,000,000 on of resets to go, and all of these resets will go at a lower margin. So there we see some downward pressure that we already know is coming.
Also, 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. And the question is how is that going evolve going forward. On the loan losses, indeed, we had quite some releases on the loan loss provisions because of the basically the strong economy, unemployment going down, but also LTVs dropping.
Now 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. Then 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.
So 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 Kloeg.
ING. Yes, two questions from my side on the P and C. First of all, I mean, yesterday in the conference call of ASR, 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? And the second point is if I look on the gross written premiums, especially on the P and C side, and 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?
Yes.
I think on the market, we have been seeing premium increases. And then 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, are premiums going up or down because some of it be going up. In other risk categories, premiums could be coming down. And 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.
So it will be less easy to judge whether the whole market is 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, because there and we're okay with that. Because 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.
So that plays a role for stopping certain portfolios. So 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, also 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, and then I'll go back to you, Nadeem.
Hi there. Thank you very much. Farooq Kenny from Credit Suisse. Just a question on the DB book. You've mentioned GBP 3,500,000,000 of SCR, and I think that chart is ex new business.
And 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 time frame was. So just some discussion around that. And 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?
Yes. 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. And this niche is a profitable niche. This niche is a growing niche. And where I sit how why do I think that that's a good thing?
I think 2 major reasons. Because we are focused on a niche, we've only got these products that we concentrate on in terms of continual improvement. And 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 come 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 products, all new products have to be, in effect, approved by the regulator and there's only so much capacity that the regulator has in with regard to legal entities, then 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.
Now our distributors know that, yes? Our clients know that. And 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? But we're just not seeing that. We're continuing to see great growth in the marketplace.
And I think if it was owned by a bigger player that had individual segments and they just wouldn't have the competitive advantage that we've created in this market. Now coming back to your how do we get our hands on the remittances, I think the fact that the over the last few years, the payback periods have come down. The protection business that we're now writing, again, is more profitable. So I actually think we are going to be able to see this coming through in remittances over time. And in the short term, obviously, there is that new business strain that we contend with.
But 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 VB book?
Yes, Farooq, the yes, so indeed, the graph is on pensions is running up, and that's excluding new business and renewals. But keep in mind that most of the renewals are DC. So the impact of that, of course, is smaller than had it been traditional DB renewals on the runoff of the SCR. Yes, ways to accelerate, yes, of course, we have on the one hand the move where we are moving some towards high 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. So for now, this is what we're sticking to.
Okay. Thank you very much. I think, Patrick, did you still have a question?
Patrick Lemus from Baeco. Two IT related questions. How do you determine within NN whether Satish needs money for artificial intelligence and then block chain trials and needs a lot of money for that. But then international also needs a lot of money. So how do you sort of get through that?
I mean, deciding who gets what? And then regarding the Dutch Life, maybe some more detail on the Dutch 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. So what is the sort of the move there? Is it all going to move to Delta Lloyd Systems?
Or is it perhaps a sharing of systems? Or yes, it seems like a big IT project and we haven't heard details on it.
Yes. Yes.
Do you want me to say
to this one, Yves?
Sure. Go ahead.
In terms of the deployment of capital, it all comes to international. I think as you can imagine, we have very 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. And we have all of that, the rigorous disciplines you'd imagine on that. I think where we actually benefit is actually we have a single basically 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. So 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, 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.
And then on the Dutch?
Yes. I think on the indeed, it is a massive IT program for the Dutch pension business. I think the so we went system by system to make trade offs. But 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. However, then you would have to do all the interfacing to the full NN environment, which would then make the whole trade off difference.
So I think we for most systems, we've made the decision already. And I think also the costs are related to the volume. So what we see is we have an SAP platform within NN that actually runs well, but we still consider it subscale. And if we would add the Delta Lloyd pension book to this, we believe that it will actually become very efficient. So we haven't made all the choices, but some and some of the big ones we have.
And for the pension book, that is the SAP platform.
Thank you. And then there was a question from Nadine first, and then I'll come back here on this side of the
room. Nadine from Morgan Stanley. A question for David. So I suppose high level in the Netherlands. With regard to new business value, so 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. And I suppose that's my second question. The excess spread, you're trying to keep that up by rerisking. That's maybe not a question for you, but for somebody else.
But ultimately, on an absolute basis, that is coming down because the old business is running off. So yes, 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?
Yes, let me try to thanks, Nadim. Let me try to answer that. I think for pension new business, so what we see is that the DC business, as you 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 still 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. Now the good news, of course, it's capital light, and that plays which is also plays a role into the SCR. In terms of margins, so it is a bit comparable to the Asset Management business. So we expect to make a margin on assets, which will also for a large extent is now with NNIP. The life insurance business will make a margin on the technical side, so morbidity.
That's in the accumulation phase. Over time, decumulation will become more relevant. It's still very small because I mean, we do have people retiring, but they typically have quite a DB book buildup and then for a relatively short period DC. So what we actually see is that the rollover market is still small, but we expect it to grow in the decumulation 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. I mean, as you know, that depends on many factors. But so 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. So 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. So 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. And then I'll
come to
you, Arjan.
Yes. On the Dutch Non Life again, the combined ratio target was 97% at the time of the IPO as well. And I think in 2014, I mean, it was actually in that range. But after that, consistently, it has deteriorated. So what gives the management confidence that this time around, it won't happen the same and the target will be achieved?
That's one. And second, on the Insurance Europe business, I mean, 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, etcetera, Turkey? I mean, will there be more value if you did not have that? Or, you know, there is some path towards higher ROEs and definite profitability in the future?
Yes. Let me take the question. Yes, indeed, around the IPO, we also had the 97,000,000. It was above 97,000,000 also then. And to make my own life even more difficult, the definitions are not completely comparable.
So 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 and C, but it does on the D and A combined ratio. So 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. So 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. So 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.
And motor has been difficult on many accounts, but a lot was driven by prior year results where we strengthened our provision in Q2 with €40,000,000 from other liability. The behavior so far in line. So also there we're taking our 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. And then we have a new business mix.
We have with ORA and OMAOMO, we also get a different mix. So there's yes, there's quite a few reasons that we believe we will be now successful in bringing it to 97 or below. But I fully understand we still need to prove that.
And then there was the other question on the European ROE.
Yes, 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. So 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. Now 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. And that's why I think we're quite confident that actually in terms of VNB numbers, look very stretching on the charts, are actually achievable over the next few years. Now 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. But I think if we do that, there's a very good chance that we'll achieve those targets of having the achieving our cost of capital by the end of 2020. And 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. And have we strategically got a strategy which is going to allow us to access those profit pools?
And Turkey is 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 it's creating a new market where we're doing a tremendous job of actually capturing that market. But at the moment, given all of the numbers, how successful is auto enrollment going to be in Turkey? Let's wait and see.
But I really do have aspirations. And 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.
And then here, there was a question from Arjen. Then I'll move back to I think, Farquhar had the next question.
Arjan van Vijn, UBS. On Japan, the growth has been coming a lot from the new channels, Sumitomo Life and the bank, and it looks like you barely touched that. So the growth opportunity is still very large. So just curious as to is there a margin differential and payback period differential between that and the other business? And maybe if I can ask the P and C question the other way around.
If I look at your cost targets, that knocks 3 points off your combined ratio. The actions you're taking should probably knock the other 2 off. So what's what are you worried about to not get there? So it's also about the underlying inflation trends. It's been, I think, a benign year this year, relative to other years, some investment yields to headwinds.
What are some of the key things that may lead to you not getting there? Should
I take Japan 1? Yes. I think in terms of Japan, the actual traditional channel of independent agents and tax advisers 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.
So there is no difference. The deal that we did with Sumitomo were on the same basis as, let's say, one of our preferred or larger independent agents. So there's no difference in terms of margin as to where we grow it.
Yes. I think on the question on Non Life, well, to be honest, there isn't one specific big concern. I think when you're 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 ORA or or IVR number or ING will continue to be at the low combined ratio. So that, of course, is requires a lot of work to continue that.
And then we have a challenge for fire and motor that we extensively talked about. So I think that there's always the question on the weather related claims, what is the impact of that. So there is I think we have 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 there is 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. So we will be on top of all business units to make sure that we get the combined entities below 97.
And then first, Farquhar, then Juno.
Farquhar Autonomous Research. Just two questions, if I may. Just coming firstly on the Dutch investment allocation, I think Slide 9, if I recollect. And slightly higher on sovereigns in the industry, but it's only about 3 percentage points on about €105,000,000,000 of assets. I mean, in terms of your rerisking strategy, do you intend to go materially below the industry average in terms of sovereign allocation?
Just as a question. And then secondly, more broadly on the Dutch business, you're kind of indicating flat earnings overall, a 20% cut in costs. So implicitly, there seems to be about £100,000,000 drag against earnings over the medium term. Could you just decompose that drag? And is how much of that is coming from the rerisking strategy, which as we say is additive to capital generation but negative to IFRS?
Sorry, to be honest, I thought the other question was on I missed the second question.
The other question is the 20% cost reduction that you're aiming for in Netherlands Life seems to be a drag of approximately $100,000,000 on the income side. Can you decompose that? And how much is the investment margin?
Yes, exactly. If you're cutting costs by 100, 20%, why is earnings flat, you decompose it? And how much of that is the active decision to re risk?
Yes.
Okay. Well, indeed, we do see opportunities to move more into corporate bonds and certainly also mortgages that Enen Bank originates. And so mostly probably coming out of government bonds. We haven't in terms of numbers, we still need to see how we do this because, of course, spreads move, mortgage spreads move. So we'll have to see over time how this 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.
But we do see room there. Yes, 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 D.
C, 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. So and the combination of that leads, in our view, to a broadly stable result.
Okay. And then I think there was first a question here from Johnny, and then I'll get to you, Claudio.
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. But when you look at the solvency position of the Belgium business, it's very thick. So is it just a function of you've got too much capital in that business?
That's the first question.
So
you're going
to look like a genius in a year's time.
Pete, I'll be
a first.
The second question is just in terms of the Japanese bank assurance sort of deals. How are they structured? Are they structured as a JV? Are they structured in commission? And what's the payback on that?
On which ones?
The Japanese.
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. So I think of I can't remember the slides. I think it shows the total solvency of the Belgium business to be around 340 2 ish something. About 150 percent 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. So 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 regulators are going to start allow us to start taking dividends out that relate actually to transitional measures. So 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 think we believe in the longer term we need in that market. Hopefully, there's some room, but time will tell. In respect of the Japanese market, actually, they're large it's largely with most of the banks in Japan, it's largely on a straight distribution deal.
So 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. And then next question is for Claudia.
Claudio Gaspar, 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. So I wanted to understand, first of all, do you feel now after the Delta Lloyd integration that you had enough scale in your chosen segments? If not, I guess it's not a world where it's very easy to grow organically.
So what are the potential solutions? And then 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. So
let me thank you for that. I was you're right. I was getting away too lightly here, wasn't I? So 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% to 10% of the combined 2016 expense base of the 2 entities. If you look at from a scale perspective, I think back to your first question, the way we look at scale is in 2 ways.
1 is the overall asset base and second is scale at a level of capability or strategy. So 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 3 different aspects and 3 different ways to get there. 1 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 1. 2nd 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.
And 3 is to look at and be open to any bolt on acquisitions. And again, back to what Lard keeps saying is we look at this in a very, very structured and stringent way, both financial and non financial capabilities. And the 4th 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?
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 9, seems to show APEs representing about 9% in 2014 and has gone up to about 15% for the 9 months of 'seventeen. But 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. Now the corollary to that would be the fact that new business strain appears to be higher, which has an impact in terms of remittances, which if I recall correctly, the net remittances from Japan Life has been declining since 2013.
Now with that backdrop, would should we expect that remittances from Japan would turn 0, and therefore, Japan Life would be a net user of capital in the medium term? And 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. In request sorry, in respect of your first point, I'm just trying to do the sums and seeing where the numbers are. Okay. So 9% to 15% in terms of the market share. Yes.
So what we actually see is we're seeing the operating leverage coming through in the VNB numbers, particularly on the banks where the fixed 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 2 of the dynamics on remittances. There's a third dynamic.
The 2 we've talked about is the overall growth of the COLI business. We've talked about the new business strain. The 3rd dynamic is, as you remember, whilst we've got the segment NNRE 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. Now they've been coming down quite substantially over the last few years.
So 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. So 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. But 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. But I think they're the 3 dynamics that you should consider when you're thinking about that block. Your last question with regard 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 actually there are that as a consequence of, let's say, our unique positioning solely
that niche.
A question from Stephen Haywood.
Stephen Haywood from
HSBC. On the Japan side of things again, sorry.
Can you
remind me of the remittance constraints under JGAAP under the JGAAP operating profit? The walk Remittance constraints. Remittance constraints. Is it fivesix or 4five of JGAAP profit that can be upstreamed per year? And then the second question.
It looks like your debt operating growth will rise quicker than your operating growth for the whole of NN. So the net operating result will grow quicker than the pretax result because you've got corporate tax cuts coming in Netherlands, Belgium and Japan. Now I don't know whether all of these tax cuts will come through. I know they've been proposed. And this should support net operating growth from now onwards pretty much.
But 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 5.6th question because it's 5.6th.
That was an easy one.
Yes, it is it's 5, 6,000,000 of the net operating profit. So 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 would be crazy for any of us to pretend we understand the impact of the taxes.
But I'm sure Delfin, though, will be very, very good
at giving that answer. Sorry?
On the products.
On the products, so on the sales of COLI products, if the taxes get reduced in Japan?
So the taxes have been I mean, it's part of if we look at Avonomics, 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 and medium sized enterprises, owners still wanting to basically purchase the COLI products as a way of protecting their interests and their legacy. So we still see that same interest in the product.
Any further questions? One more follow-up question from Kunal.
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. But then you also mentioned that you are looking to grow your flagship products. So where does that tie up? I mean, am I missing something?
And secondly, it looks like the fee revenue from so the fee margin from propriety AUM is very low. So is there versus the 3rd party. So is there anything going to be done to increase that or some color on that will be helpful? Thanks.
Yes. So 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 will be a net number after being able to also absorb the inflationary regulatory pressure. So that's one aspect of it. If you look at the top line, I think there's going to be 2 or 3 different aspects that will drive the top line.
One is we will aim to grow the top line from a 3rd party perspective. That's 1. 2, as you are well aware from an industry standpoint, there are margin pressures and we expect to see that coming along as well. And 3, 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 will be some outflows.
So it's a combination of all of those 3. So broadly speaking, what you will see is you will see broadly flat or broadly stable top line as a result of those 3 or 4 different aspects and going after the expense side as part of the integration and beyond. And to your second question, I think the fee margin, the fee pressure will be ongoing, whether it's looking at 3rd 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. So that free margin pressure will continue.
Yes.
So 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, And thanks for all your questions. And 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.
So I
have another 144 slides for you,
and
then we're going to go through now. So first of all, yes, we have come to the end of the formal section of this day, ladies and gentlemen, and I think it's I thoroughly enjoyed it. I hope you enjoyed it as well. It's a lot of information. I understand that we've had that we've given to you.
I hope the information is relevant to you, which allows you to contemplate it, to think and to consume it and internalize it. And then we're more than happy to read all the reports that will come out in the coming days weeks. And obviously, we'll follow-up also in the roadshows 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 Delphi transaction.
We 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, and we're very pleased with that. So 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 Delto Lloyd and NN in the Netherlands and Belgium. So 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.
Then Delfin and Jan Hendrik talked about our approach to capital management and risk management. And during the afternoon, you heard from all the leaders of the businesses themselves on how they operate their businesses. So what are the key messages that I hope you'll take away from today's meeting? Number 1, we're committed to successfully integrating Delta Lloyd and extracting the synergies, deliver the goods, as I said. This means being disciplined in 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. Now this process will involve many changes, which will have a large impact on the organization and our employees, but 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. And that's our mantra that we live by, not voluntarily suggestions, and also in this process to our employees. And 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 2, 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 to date. 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 and in Europe and in Japan, we will accelerate our profitable growth.
Number 3, 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. And it is also about making our organization lighter on its feet, more agile and the processes more efficient, flawless and less expensive. And David and Robin today gave some examples of the initiatives that we are implementing in the markets. And 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 commitments to our dividend policy and our pledge to return excess capital to our shareholders unless we can deploy that capital in value creating opportunities. So I want to thank you for being here today. We know that there is also other companies that have their investments their investment markets days and their communication moments. And we're very, very pleased that we have 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.
And 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. And 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. And thank you all for being here today. And thanks also for those on the webcast for joining us today, and thanks again for all your questions.