Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's Analyst Conference Call on its Q3 2016 Results. The telephone lines will be in listen only mode during the company's presentation. The lines will then be opened for a question and answer session.
Before handing this conference call over to Mr. Lard Friese, Chief Executive Officer of NN Group, let me first give the following statement on behalf of the company. Today's comments may include forward looking statements, such as statements regarding future developments in NN Group's business, expectations for its future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward looking statement. Any forward looking statements speak only as of the date they are made, and NN Group assumes no obligation to publicly update or revise any forward looking statements, whether as a result of new information or for any other reason.
Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Mr. Friese. Over to you.
Yes. Good morning, everyone, and welcome call to discuss NN Group's results for the Q3 of 2016. I will start off today's presentation by looking at the highlights of the Q3 results as well as the progress we are making to deliver on our strategic priorities. Delfin Rueda, our Chief Financial Officer, will then talk you through the financial details of the results at group level and for the individual operating segments as well as our capital position. I will then conclude the presentation with a wrap up after which we will open the call for questions and answers.
Now for the first time today, we have Jan Hendrik Erasmus, our Chief Risk Officer with us to answer your questions. Let's dive in and go to Slide number 3 with the highlights. NN Group's operating results of the ongoing business for the Q3 of 2016 was €319,000,000 This compares with an operating result of €392,000,000 for the same quarter last year, which benefited from a large private equity dividend. Excluding private equity dividends in both quarters, the operating result improved by 15%. In the Netherlands, we were able to lower the expense base by another €21,000,000 continuing the progress on our expense reduction program.
We've also continued to shift to higher yielding assets at Netherlands Life to offset the impact of lower interest rates. At Insurance Europe and Japan Life, we generated significantly higher sales in the 3rd quarter. At the same time, NN Investment Partners was able to attract €600,000,000 net inflows in 3rd party assets despite a difficult asset management environment. NN Bank continues to report healthy growth in both mortgages and savings contributing to a higher operating result. On the other hand, we continue to see pressure at NetEvan's Non Life while the combined ratio improved to 101.8 percent in the 3rd quarter, we recognize that more work is needed to bring it down to the target level of 97% by the end of 2018.
Our balance sheet and capital position remains strong. Free cash flow to the holding company was €298,000,000 driven by €320,000,000 of dividends from our subsidiaries, bringing the cash capital at the holding to €2,400,000,000 at the end of the 3rd quarter. Solvency II ratio of NN Group decreased to 2 36%, mainly reflecting the impact of credit spread movements partly offset by the operating return of the business. I will now turn to Slide number 4. As you are aware, we made public on the 5th October our intention to make an all cash offer for all issued 2nd November.
We continue to believe that the potential transaction is financially and strategically compelling beneficial to stakeholders and representing a full and fair value to shareholders. So far, we had some limited interaction with Delta Lloyd Senior Management including some high level conversations that have not yet progressed to the substance of the transaction. However, we do hope that we will have more substantive discussions in the coming weeks as we move towards the 28th December in our draft filing with the AFM. We have noted the disclosure by Delta Lloyd yesterday on the cost and capital synergies as well as their update on Q3 financial and operating trends. And while I will obviously not go into the details, I will make a few observations.
As you can imagine, we developed our outside in view on synergies before announcing our intention to make an offer at €5.30 per share. In this respect, we feel that the pretax €200,000,000 of cost synergies suggested by Delta Lloyd represents a high percentage of the real addressable cost base, given several areas identified by them as having very low to low synergy potential as well as the ongoing cost reduction plan of Delta Lloyd, which will further reduce the addressable cost base by 2018. On capital topics, we will need to look carefully into the underlying assumptions to assess their actual value given the uncertain nature of those potential benefits. We view a large proportion of what has been identified by Delta Lloyd as either not to be valued 1 for 1 or items that can be achieved on a standalone basis and therefore already are reflected in base values. Both of these costs and capital items are clearly before any dis synergies, restructuring charges, execution risk and alignment of solvency assumptions that may or may not be needed.
Finally, it is clear that we need to continuously assess the total value of the combination, taking into account information presented with Delta Lloyd's 3rd quarter results, including the decline in the solvency ratio and the identified headwinds to cash flow. To summarize, we continue to believe in the strategic and financial logic of a combination and we remain constructive on engagement. It is important as you will understand that we have access to information in the coming period in order to allow us to validate our outside in assumptions. And needless to say, we will update the market further if and when appropriate. Now on the next slide, I will talk about developments in customer services at our business units.
NN Group aims to help secure their financial futures, help people secure their financial futures and is committed to delivering products and services that are easy to understand and meet customers' lifetime needs. An example is the launch of a new corporate owned life insurance critical illness product by NN Life Japan, driving significant growth of new sales in the 3rd quarter. At the same time, our Dutch Non Life business launched a marketing campaign in Belgium to promote its new home and family insurance product covering building and contents as well as legal aid and liability. The initial results are encouraging. The APF that was set up by AZL and in Life's pension administrator and in Investment Partners received its license from DNB.
The APF provides an attractive solution for pension funds and employers to comply with increasingly complex pension regulations and to benefit from economies of scale. NN Group serves its customers through multiple channels to achieve profitable growth. In line with this strategy, NN Life Japan recently entered into a long term collaboration with Sumitomo Life Insurance. Sumitomo Life Insurance will sell and enlife Japan's COLI products to small and medium sized enterprises through its nationwide tight agency network. The agreement also provides a framework for collaboration on potential future product initiatives.
Finally, NN Group aims to make its processes as efficient and effective as possible across all segments. The international business continues to focus on protection products via bank assurance channels and tight agents. In addition, sales channels are being digitalized leading to more efficient operations. This quarter NN Hungary introduced an online client portal NN Direct, which is the 1st online client portal in the market with an audited electronic signature increasing the means of communication with customers while simultaneously reducing cost. I will now turn to Slide number 6.
In the Netherlands, our strategy is centered around providing digital, personal and relevant services with the aim of enhancing customer experience. And let me give you some examples. Based on our knowledge of a customer, we can proactively offer services or products that we believe will fit their needs. We call these next best actions. In 2015, we included 150,000 of these next best actions in our customer conversations and we are on track to reach 500,000 this year.
The result is higher satisfaction, lower consumer losses and increased sales. We follow a similar strategy in pensions where our new online service pension assistance provides personalized pension information to customers and non customers alike. Our Dutch Non Life business launched a pilot in the Q3 for a new customer service called PreventionScan. This service provides for an independent prevention coach to perform a comprehensive check on the client's house, tailor made advice on how to improve fire safety, prevent burglary and avoid water damage as well as assistance to implement these safety improvements. Overall, as well as our ongoing focus on cost and capital management, we continue to innovate and invest in enabling our Dutch businesses to provide excellent customer experiences, something we think is essential to the interest of all our stakeholders.
And with that, I will now hand over to Delfin Rueda. Delfin?
Thank you, Lard. NN Group reported an operating result of the ongoing business of €945,000,000 in the 1st 9 months of 2016. The operating result for the same period last year benefited from higher private equity dividends and a significant higher technical margin in Netherlands Life, while this year was impacted by higher claims in Netherlands Non Life as a result of severe storms. On the other hand, NN Bank reported a strong growth in results as it continues to expand its mortgage and savings activities. The decrease in the net result for the 1st 9 months of 2016, which you can see in the right hand chart, can be mainly explained by the lower operating result and a higher negative hedge result in Japan Closed Block VA due to increased market volatility, partly compensated by higher non operating items.
Please now turn to Slide 9, which gives more details about the expense savings in the Netherlands. About a year ago, we set ourselves a new cost base target in the Netherlands aiming to reduce the annual administrative expenses of Netherlands Life, Netherlands Non Life and the holding entities to EUR 685,000,000 by the end of 2018. With this target, we will reduce expenses by around 15% compared with the annualized cost base at the end of the Q3 of 2015. This expense reduction program is on track. In the Q3 of 2016, we realized EUR 21,000,000 of additional cost savings, bringing the cost base in the Netherlands down to €765,000,000 on a last 12 month basis.
However, note that the progress in realizing cost savings will not be linear from quarter to quarter due to timing effects, project related expenses, regulatory pressures and the need to invest in our businesses. We still have a lot of work to do to reach this ambitious expense base target as we have to deal with these upward cost pressures. But we are committed to the target and we believe that these initiatives will make our company more efficient and agile and will improve the customer experience. Let's now look at the Q1 performance of each individual segment, starting as usual with Netherlands Life on Slide 10. The operating result of Netherlands Life was €178,000,000 in the Q3 of 2016.
This is a decrease from EUR 267,000,000 a year ago, which benefited from a EUR 110,000,000 private equity dividend. The Q3 of 2016 included a €13,000,000 private equity dividend. An increased allocation to higher yielding assets helped to offset the impact of the low interest rate environment on reinvestments. The last 12 months investment spread was 114 basis points. Fees and premium based revenues were down, reflecting the runoff of the Individual Life closed book and lower margins in the pension business.
The technical margin also declined as the Q3 of last year was supported by EUR 6,000,000 of technical provision releases as well as higher mortality results. These items were compensated by lower administrative expenses due to lower staff related expenses and IT cost. I will now turn to Slide 11 for the results of Netherlands Non Life. The operating result for Netherlands Non Life decreased to €21,000,000 from €24,000,000 in the Q3 of 2015, which was supported by a private equity dividend of EUR 17,000,000 The combined ratio improved to 102% from 106% in the Q3 of 2015. This was driven by a better underwriting performance in both Property and Casualty and Disability and Accident.
Let's now look at the 2 business lines within Non Life separately. In disability and accident, the 3rd quarter operating result decreased to €25,000,000 from €32,000,000 in the same quarter of 20 15, which included a €12,000,000 private equity dividend. The current quarter reflects a positive claims development in both the individual disability and the group income protection portfolios. The disability and accident combined ratio was lower at 97% compared with 100% in the Q3 of 2015. The operating result in property and casualty improved to a loss of €5,000,000 from a loss of €7,000,000 in the Q3 of 2015, which included a €5,000,000 private equity dividend.
This quarter reflects an additional impact from the severe storms witnessed in the Q2 of 2016 of €3,000,000 The Q3 of 2015 was impacted by severe summer storms in both the fire and motor portfolios. The P and C combined ratio decreased to 106% from 110% in the Q3 of 2015. Please turn now to Slide 12 and the results of Insurance Europe. Insurance Europe reported an operating result of €52,000,000 for the Q3 of 2016. This was broadly stable on the same quarter of 2015 as higher fees and premium based revenues and lower commissions were offset by higher administrative expenses.
The cost income ratio increased on higher administrative expenses, reflecting the tax on assets of insurance companies that became effective in Poland as of February 2016 and higher project expenses. New sales increased to €100,000,000 in the Q3 of 2016, up almost 14% year on year, excluding currency effects, largely driven to higher sales of less capital intensive savings products in Spain and Greece. Moving into Japan Life in Slide 13. The operating result of Japan Life declined 7.9% from the Q3 of 2015, excluding currency effects, reflecting lower mortality results. Fees and premium based revenues increased partly offset by higher DAC amortization and as higher income was only partially offset by higher administrative expenses.
New sales increased to €209,000,000 up 22.6% from the Q3 of 2015 at constant currencies. This was due to the launch of a critical illness product in the COLI market in July 2016. I will now turn to Slide 14 and the Asset Management segment. Total assets under management increased to €199,000,000,000 from €197,000,000,000 at the end of the second quarter. The increase was driven by positive market performance a result of lower interest rates increasing the value of fixed income assets.
Despite a difficult asset management environment, NN Investment Partners was able to attract EUR 600,000,000 net inflows in 3rd party assets in the Q3 of 2016. This was offset by outflows in the other affiliated business and proprietary assets. The operating result increased to €38,000,000 in the Q3 of 2016 from €34,000,000 in the same quarter last year. Expenses decreased, reflecting lower staff related expenses as well as lower project cost. Fees were also down due to a movement to lower margin assets.
The cost income ratio decreased as expenses decreased more than fee income. The segment Other is set out on Slide 15. The operating result of the segment Other improved to a loss of €11,000,000 in the Q3 of 2016 from a loss of €23,000,000 in the same quarter last year. The holding result improved to a loss of EUR 30,000,000 mainly driven by lower holding expenses due to lower staff and IT cost as well as timing effects. The operating result of the reinsurance business decreased to €2,000,000 in the Q3 of 2016 from €4,000,000 in the same quarter last year, driven by lower underwriting results.
Finally, the operating result of NN Bank increased to EUR 17,000,000 in the 3rd quarter, up 9% year on year. This increase reflects a higher interest margin partly offset by higher administrative expenses as we continue to make investments to support the bank's strong growth in the mortgages and savings market. I will now move on to Slide 16 to cover our last segment, Japan Closed Block VA. Japan Closed Block BA reported a loss before tax of €13,000,000 compared with a loss of €64,000,000 in the Q3 of 2015, reflecting lower hedge related losses. The Q3 of this year also reflects lower fees and premium based revenues as the portfolio continues to run off.
The runoff of the Japan Closed Block VA portfolio continues to evolve as expected. We do now expect NNRE in the Netherlands to release capital of approximately €400,000,000 by the end of 2019, plus or minus hedge results. With that, I completed the results of our operating segments. On the following slides, I would like to take you through the free cash flow and the capital position. On Slide 17, you can see the movement in the holding company cash capital during the Q3 of 2016, which increased to EUR 2,400,000,000 at the end of the quarter.
The free cash flow during the Q3 was €298,000,000 which included dividends of €320,000,000 received mainly from the Dutch units. The details of the dividends upstreams per segment can be found in the appendix to this presentation. During the quarter, we had capital flows to shareholders of EUR 244,000,000. This comprises the cash part of the 2016 interim dividend of EUR 130,000,000 and the amount repurchased under the share buyback program in the Q3 of EUR 130,000,000 On Slide 18, I would like to take you through the developments in NN Group Solvency II ratio. On this slide, we show the movement of the NN Group Solvency II ratio, the legible Own Funds and the solvency capital requirement over the Q3 of 2016.
In the Q3, the solvency to ratio decreased from 252% to 236%, mainly due to market variances, partly offset by the operating return. Let me spend a moment to explain the main movements in a bit more detail. Starting with the largest movement, market variances, which had a negative impact on the Solvency II ratio of 22 percentage points. This mainly reflects the impact of higher credit spreads on highly rated government bonds and lower credit spreads on corporate bonds. The latter led to a lower VOLA, resulted in an increase of the value of our liabilities.
This was partly offset by positive equity revaluations. This negative impact of market variances has more or less reversed the positive impact on the Solvency II ratio of 21 percentage points, which we benefited from in the Q2 of this year. The operating return had a positive impact of 5 percentage points. This quarter, the eligible on funds includes the net result of asset management for both the Q3 and approximately €40,000,000 for the 1st 6 months of 2016. Starting from now from the Q3 of 2016, we recognize the net result of asset management on a quarterly basis.
As I have highlighted in the past, the operating return will move around quarter by quarter. The bucket other mainly reflects the impacts of the update of the Vola reference portfolio this quarter. The solvency capital requirement increased slightly mainly due to interest and credit spread movements in the quarter. Finally, in light of the intended offer for Delta Lloyd, the €500,000,000 share buyback program has been suspended for an amount of €333,000,000 This amount of EUR 333,000,000 continues to be deducted from own funds at the end of the third quarter. We may add this amount back in the Q4 if the share buyback continues to be suspended and depending on the status of the Delta Lloyd transaction at that time.
And with that, I will pass you back to Lard for the wrap up.
Yes. Thank you, Delfin. I'm on Slide 10 and Slide number 20 now, the key takeaways. Going forward, our focus remains on delivering excellent service to our customers, while making our operations more efficient and effective and pursuing profitable growth in selected European markets and Japan. Our priority is to improve the operating performance of our businesses to increase earnings and generate cash.
We are progressing well with these strategic priorities, but there is still more work to do. The entire management team is committed to doing this, while at the same time having to deal with regulatory changes and market conditions. Our capital position remains strong and resilient even in this volatile environment and opens up possibilities for inorganic growth. We believe that a combination of Delta Lloyd and the Dutch and Belgian activities of NN Group is financially and strategically compelling and beneficial to both company stakeholder groups. Our intention remains a recommended transaction and we will update the market at the appropriate time.
I would now like to open the call for your questions And can I kindly request you to limit the number of your questions to 2 per person so that everybody gets a chance to speak? Of course, feel free to come back with a second round of questions if they have not yet been dealt with. And with that, I would like to hand back to the operator for organizing the Q and A.
Thank you, Mr. Friese. Ladies and gentlemen, we will start the question and answer First question is from Mr. Cor Kluis, ABN AMRO. Go ahead please, sir.
Good morning. Cor Kluis, ABN AMRO.
Got two questions. First question is about Delta Lloyd. If the management of Delta Lloyd does not give or enable a recommended transaction, will you still continue to try to acquire Delta Lloyd or not? So that's the first question. And the second question is about your extremely strong APE premiums in Japan Life for the €209,000,000 APE due to the launch in of the new product in July.
Is that kind of 1 quarter effect? Or could we, for the next couple of quarters, expect quite elevated APE premiums from this successful product launch? And could you also highlight a little bit something about the profitability IRR or versus cost of capital, how profitable that product is? That were my questions.
Yes. Thank you very much, Cor. So first on your first question regarding Delta Lloyd, I don't think it's helpful to speculate on how things may evolve over the coming period. As we said, I mentioned we had some high level conversations, but not yet got into the substance of the potential transaction. But we remain open for constructive and more substantive dialogue and we do see the merits of this transaction and we aim for recommendation.
But I'm not going to speculate on any potential outcomes of this. On the growth in Japan, yes, we are pleased with the fact that our Japanese business has been able to show already for quite a while a sustainable good growth pattern in terms of sales. It's a well positioned business in the SME market segment in Japan. You do know that sales are of course seasonal. So it's usually it's traditionally the highest in the Q1, which is the end of the fiscal year in Japan and to a lesser extent in the third quarter, while sales are often seasonally somewhat lower in the second quarter and the fourth quarter.
And this time, we had a very good sales quarter on the back of indeed a new critical illness product that we launched, which is indeed also profitable. And I certainly also believe that the Sumitomo long term partnership will help to strengthen also the further penetration in the market segment. And we have signed that partnership in the Q3. We aim to start so the transaction, so not the partnership with Sumitomo Life. We aim to start the sales as of April next year in which the nationwide network will continue to carry our products or will start to carry our products in the SME segment.
So in that sense, good sales momentum and we expect also the sales momentum in the future to continue in the back of the developments I just mentioned.
The next question is from Mr. Arjan Van Veen, UBS. Go ahead please, sir.
Thank you, gentlemen. I have two questions on capital, please. The first one is on the 22 point movements. You had credit spreads and then corporate bond spreads sorry, Southern Spreads and Corporate Bond Spreads. Did you make any adjustment to the reference portfolio on the volatility adjustment?
And then did that have an impact in this quarter? And if not, are you planning to do so in the future? The second question is on capital generation. If I now look at the 3 quarters you reported this year, it was roughly 2% in the Q1, 3%, 3.5% in the second quarter adjusting for some of the one offs and now 4% taking out the Asset Management profit. So I'm just trying to I know it's volatile, so do you have any color you can give us on what you think a full year number is or a sustainable number is going forward?
Thank you.
Yes. Thank you, Arian. The first question will be taken by Jan Hendrik, Erasmus and the second question by Delfin. So Jan Hendrik, over to you.
Thank you, Lard, and good morning, Arian, and everyone on this call. Firstly, let me say it's very good to be here after taking over from Doug Caldwell as the CRO of NN Group, and I hope to meet many of you in person in the coming months. Now to answer your question, Arian, yes, EIOPA updated the VOLA reference portfolio from the 30th September, And the impact on our VOLA was around 2 basis points, and this is in the number. The impact on our Solvency II ratio was less than 3 percentage points.
So, Delfin, maybe the capital generation?
Yes. I mean, in terms of capital generation, as you know, we look at it from the perspective of the free cash flow generation coming from not only the change of own funds, but also the movement in the solvency capital requirement and the release of surplus capital from the different legal entities. Each quarter, we have seen different evolutions. The main driver has always been the market movement so far. And within the operating return, we have highlighted every quarter what are the most relevant one offs in order for provide some more clarity on what you could perceive as the main capital generation in that particular quarter.
And I would not like that to extend too much in order to what I have explained in previous calls that this capital generation varies from 1 quarter to another. I think that in the Q3, we have highlighted EUR 40,000,000 of 1 offs related to the fact that it includes the net profit of Asset Management for the full 9 months of the quarter. And as I said during the presentation, going forward, we will include them only on a quarter per quarter basis. So that should give should provide more stability there. If you were to exclude that, we are approximately on the EUR 200,000,000 of operating return in the quarter.
And as I said, there is nothing particularly exceptional apart from what I said for Asset Management. But let me insist again, every quarter will depend on the starting position of the Solvency II balance sheet. So it's difficult to just predict or normalize any particular quarter.
Okay. Thank you.
The next question is from Mr. Ashik Musaddi, JPMorgan. Go ahead please, sir.
Yes. Hi, good morning. I just have a couple of questions. I mean, Delta Lloyd is still a bit confusing what's going on, you have daily given your thoughts. But what if it doesn't go through?
How should we think about your plan B or plan C with respect to your capital, I. E. What should investors be thinking with respect to your excess capital given that it's now very evident that you have loads of it? So that's number 1. Secondly is, can you get some color about this cash flow that you're getting from your bank book?
At 9 months level, already you have got SEK 1,200,000,000 cash from subsidiaries to the holding company. So what is the right level on an annual basis, I. E. What are one offs in 1st 9 months? What is a recurring number we should think about?
Is it still like around $1,000,000,000 number? Or should we be penciling in a bit more than that? Thank you.
Yes, Ashik. Good morning. Let me take the Delcoite question and then I'm going to ask Delfin to take your question on the cash flows from the back book. So as I said earlier, I'm not going to speculate on what will or will not evolve, but let's take a step back here. Our approach to value creation is to generate earnings, generate cash and make that cash available for distribution to shareholders.
And we've always said that the merits of the Delta Lloyd transaction are very much in line with our equity story and are an acceleration of it. And as a result, we think it's attractive to that this deal has its merits and is logical and attractive for that purpose. Now our dividend statement has always been clear, which is that we have a we aim for a sustainable dividend pattern and distribution of capital to shareholders in the form of dividends. We gave guidance 40% to 50% of the net operating earnings of the ongoing businesses and any excess cash that comes out over time beyond our ambitions and that is that we cannot deploy over time will get back to shareholders in the form of dividends or buybacks or etcetera. And that approach to value creation does not change.
So with that, maybe Delfin, cash flow from back book.
Yes. In terms of the I think your question was from what to expect in terms of overall remittance from the different subsidiaries, isn't it? Yes. Yes. From that, we have indicated in the past what were the main cash flow generations coming from the different segments, and that basically provides the framework for the sustainable dividends coming over time.
That as you remember, when we were talking for Netherlands Life, we do expect because of the runoff of the individual portfolio, although there is some pressure on the investment margins and so on, to maintain more or less the dividends. As you've seen so far, a relatively stable flow from dividends from NN Life in the last quarters has been EUR 150,000,000 plus EUR 10,000,000 of the interest on the subordinated debt. And we do believe that going forward, there's going to be some stability within the dividends from Netherlands Life. Non Life Asset Management will depend not in a particular quarter. There's going to be variance from 1 quarter to another.
But overall, similar to the operating the net profit of the units as they do not consume as much capital in order to either grow or and they don't have any runoff portfolio. Obviously, for Japan, in the closed block VA, we flagged that we had around EUR 400,000,000 still of solvency capital requirement that will be free up from now to 2019. And therefore, that's going to come later. And then in Europe, course, it depends on the evolution of the profits for each of the different entities. Maybe when I look into the recent past, just to flag that dividends, in particular from Belgium, they are a bit elevated due to the runoff of the portfolio there.
But otherwise, I think you have the main drivers of the cash flow generation and from then the expected evolution of remittance.
Okay. That's very clear. Thank you.
The next question is from Mr. William Hawkins, KBW. Go ahead please, sir.
Hi, guys. Thank you very much. Lars, in your comments on Delta Lloyd, you made a point of saying that there are specific areas with regards to the synergy comments from them where you see low synergies in contrast to what they're saying. Could you just be slightly clearer about where you're cautious on the synergies? Dutch Life sprung to my mind, but I may be wrong on that or there may be something else that was in your mind.
And then secondly, the Life technical margin, it was €30,000,000 in spite of the €8,000,000 low yield charge. So the cleaner figure was closer to €40,000,000 which seems a lot higher than the historical run rate. Can I be plugging in that higher figure for the future because of what you said about admin expenses? Or was there something else that was helping the Dutch Life margin that I should not extrapolate? Thank you.
Yes. Thanks, Will. Good morning. So on your question with regard to the synergies, yes, the following. We've done our own outside in analysis on the cost synergy potential.
And given Delta Lloyd plans to cut costs to €530,000,000 and themselves identified already a large proportion of the cost with low to very low synergies, I indeed think that the €200,000,000 would represent a high proportion of what I would call the addressable cost base. So that's how I look at it. And that's what I have to add to this. Maybe now, Delfin, over to you on the technical margin.
Yes, William. So we have indicated in the past that the technical margin volatility to provide a clear guidance, but also we have mentioned in the past to be approximately between EUR 30,000,000 EUR 35,000,000 per quarter as a run rate. And we believe that, that trend still holds with some trend downwards due to the runoff of the individual closed book and there's some pressure on margins. Apart from that, I think you did notice that the unit linked guarantee provision was negative. We had to increase the provision by €8,000,000 impacting, as I said, negatively the technical margin.
But that was also similar to what happens in the Q3 of 2015.
That's great guys. Good luck with the process. Thank you.
The next question is from Mr. Matthias De Wit, KBC. Go ahead please sir.
Hi, good morning. First question is on capital generation. Just wonder how sensitive your operating return is to changes in spreads and interest rates because your the EUR 200,000,000 is based on the Q2 balance sheet, whereas spreads and rates changed quite materially during the quarter and since the start of Q4 as well. So maybe you could share something on how sensitive or what kind of an impact this could have on the operating return? And then my second question is on the Dutch Life business, on the fee and premium based revenues.
They continue to level off compared to the last 3 to 4 quarters. And the margin is also stabilizing at around 40, 45 basis points. So just wondering how I should think about the Dutch fee and premiums going forward. Maybe you could also share some comments on what you expect in terms of margins on DC and APS type of solutions? Thank you.
Thanks, Matthias. I'm going to ask Delfin to take those questions for you.
Yes, Matthias. Indeed, the operating return, as you can imagine, is very much or significantly influenced by the starting position of the balance sheet at the start of the period. And on that, the level of the spreads is important. I'm a bit reluctant to provide very specific guidance on that because also it varies so much from 1 quarter to another. Actually, we had in a very much whatever the impact you could have expected as an indication when we were looking at the Q2 because the spreads move in one direction.
Then in the Q3 is relatively similar impact but in the opposite direction. And in any event, it's not that helpful for the Q4 because we don't know in which direction that will move again. And from that perspective, that's why we keep referring to the medium term guidance.
And is there a material change in the components of the operating return between Excess spreads and on the one hand and technical margin or expense margins on the other? Because I'm struggling a bit because in Q1, the underlying number was around EUR 100,000,000 if we exclude the impact from the transfer from separate accounts to general account. Now it's around EUR 200,000,000 despite lower rates since the year end balance sheet that was used for the Q1 numbers. So is there anything you could share on the drivers or the breakdown of that number?
Sorry, Matthias, specifically of which number are you referring to? Sorry, I did not understand you well.
Yes. Let's take it maybe offline. Just wondering if there's any change in the breakdown of that capital generation number driven by the operating return between excess spreads and technical margin?
No. I think that in the operating return, obviously, an important element is the investment margin. So that depends on the expected spreads. You also have the UFR drag and the risk margin release that, as we have mentioned in the past, depends on the starting solvency to balance sheet position. But then it is also the new business, the operating variances.
So it's not so much what are the technical expectations, but how much they vary from the already assumed assumptions embedded in the Solvency II starting position and of course, the contribution from Japan Life, Asset Management and the Pension Funds. So there is a lot of ingredients into this big pot of operating return. So there is nothing special or particular that I would flag in terms of improving or deterioration in terms of the result.
Okay. Thank you.
The next question is from Mr. Bart Horsten, Kempen and Co. Go ahead please, sir.
Yes. Good morning all. Two questions. 1 on the investment portfolio. Could you give an update on where you stand regarding the rerisking of the portfolio?
And to what extent is the 114 basis points, which you published in Q3, is that the new run rate based on the rerisk portfolio? And maybe you could give some background on the concentration of your mortgage book. How big is it right now? And do you expect more growth? And the second question relates to your non life activities.
We see good progress in D and A, but still at P&C you're above 100%. Could you give an update of the actions you've taken and how you're progressing in that area? Thank you.
Yes. Thanks Bart. Let me start this is Lard. Let me start with the Non Life area and then I will pass on to Delfin to take your first question about the investment portfolio. If you look at the Non Life, there's a couple of comments I want to make here.
The non life results, first of all, they can be volatile as they are impacted by the size and frequency of claims in any quarter, etcetera. It's the nature of the business. Disability and Accident, please bear in mind it's a long tail business, which means it's supported by investment income. So breakeven combined ratios are in fact in excess of 100%, because we have a calculation method where we don't include the investment there. So even if we would run that book around 100%, we would still be making good money.
Now we recognize in general that there is of course still more work to do to achieve the 97% or below target by 2018, but we still have some time to get there. So some of them some of these targets are more challenging than others, but our commitment remains the same. Now let's go now into the breakdown of the Non Life area. If I take a step back and if I look at the year to date evolution, if you will, the Non Life business, the Disability and Accident business is actually performing well. The 3Q combined ratio was 96.8%.
That's an improvement over the same period last year. And you've seen already also in the last quarters, apart from the Q1 where we had some elevation, a decent run rate of the D and A combined ratio evolution. So if we look then at the other piece, it's Property and Casualty. Now there we need to make a split between fire and motor and miscellaneous. If I look at the fire combined ratio year to date and if I would exclude, let's say, the severe storms that we had and that impact, then the underlying rate of combined ratio of that fire business year to date is around 98%.
So the real, let's say, concern I have is more in the motor business and miscellaneous where we have elevated combined ratios. We're doing a lot to improve those, but it's our just work. So it's a combination of underwriting improvements, pricing, re pricing of books, cutting and calling product lines in motor that we don't feel are over the long term profitable. And obviously, underlying everything is an expense reduction program that is part of the overall target for the Dutch businesses that will improve the expense ratio and that will underpin and help to get the combined ratio obviously also in a better place. One final point I want to make is that we are also seeing some negative runoff results of the past.
So we don't carry those policies any longer in the motor book on our books, but we do have the past claims that need to be settled. And we will have some runoff results coming through. They are they at a certain point will subside. But the combination of all those elements, I think we will continue to work hard to make sure that we get to our 97% or lower before the end of 2018, and we still have time to get there. So more work to be done there.
Delfin, over to the investment portfolio.
Yes. And so Bart, in terms of the mortgages and the investment margin, Maybe I should start by referring to the guidance that we have provided that because of the decrease of the low interest rates, we expected the margin in Netherlands Life to be around the same level of 213,000,000 and that was between 100, 105 basis points. The reality is that we have had higher, as you said yourself, investment margins for the Q3, the last 12 months is 114 basis points. Obviously, keep in mind that, that does include some of the high private equity dividends that were received in the previous quarters as part of the last 12 months. And I don't think we have better wisdom now that we change that guidance going forward.
In relationship of mortgages, indeed, we have been moving into higher yielding assets. And for example, in the 1st 9 months of the year, we invested more than EUR 2,000,000,000 in mortgages. It was a lower amount within the 3rd quarter. And that increases to give you the percentage that mortgages represent over the total investments of the group for is around 12.5%. So there is still some room that we could increase mortgages still within our risk appetite.
Okay. Thanks. Thanks very much.
The next question is from Mr. Stephen Haywood, HSBC. Go ahead please, sir.
Good morning, everyone.
A few questions, please. The Q4 dividend remittances upstream, are there any businesses that seasonally that usually upstream in the 4th quarter aside from the ongoing quarterly dividend you're receiving from Evolent Life. On your debt refinance that's coming up next year, is this the last debt instrument that is associated with ING? What do you plan to refinance it with? Is it Tier 1, Tier 2?
Or are you considering refinancing with senior debt and sort of taking a small hit on your Solvency II ratio for on your expenses? And then you gave the fire combined ratio year to date. Could you give the motor combined ratio year to date, please? Thank you.
Yes, Stephen. I'll ask Delfin to take your first two questions. And in the meantime, we'll get you the motor combined, which I can already give you. The motor combined for the 9 months is 113.7 percent. So the 9 months, yes?
So year to date. Delfin, the first two questions.
Yes. I mean, from the different segments, I mean Netherlands Life, I commented on it before. Generally speaking, is no particular seasonality there. So in the 4th quarter, one should consider more or less same evolution that we have had over the year. Usually, for the Europe, the business in Europe, there are dividends coming in the second quarter, the dividends for the full year.
This time, we might have some dividends coming from Belgium that we expect for the Q4. Then investment partners, again, with different levels, we do expect dividends to come. There is the Japan Closed Block V8 that again is sort of gradually decreasing, so there's no particular reason of having a special seasonality there. And also, I bring you to the attention to the transaction that was done with NNRE in Ireland, on which we do expect to have a €65,000,000 dividend Ireland that will be coming in the Q4. And then in terms of the hybrids, well, Tier 1 is not really there is no really a market there.
So it's more likely that we will refinance it with Tier 2.
Okay. Thank you very much.
The next question is from Mr. Ashik Musaddi, JPMorgan. Go ahead please, sir.
Hi. Sorry, just again, one question I have. I mean, at the Investor Day, if I remember correctly, you flagged that there are some businesses like Belgium, Spain, I guess, where your ROEs were still low and you are thinking about what to be done with those low ROEs, etcetera. So any thoughts on those restructuring where we are at the moment? I guess you have some released some capital from Belgium, but any update would be good from Belgium and Spain
and any other businesses? Thank you.
I think, I think, as we have said, we continue monitoring our portfolio. And if there are opportunities, we will consider them. But I would not flag anything in particular for either the 2 units that you have mentioned or any other at this point of time.
Okay. Thank you.
The next question is from Mr. Alain Lyon, USP. Go ahead please.
Yes, good morning. I'm just wondering, it's been 6 weeks now since the offer was announced for Delta Lloyd. As you're mentioning this morning in some of your comments, you're still struggling to get traction for the purposes of due diligence and whatnot. How do we actually bring this to the head? I know the AFM filing is due by the 28th of December, but how do we actually move this forward because it just seems to be stuck?
Well, as I said, we've had limited interactions so far that have not really gone to the substantive components of the discussions. We are open to constructive and substantive discussions with Delta Lloyd Management obviously. We will conduct this process in a very rational and disciplined manner. That's how we approach this. And indeed, we need to make sure that we that by the 28th December, that's the time before that or the time that we have to file a draft of a memorandum to the AFM.
And there's multiple things ahead. There's no while we do appreciate the merits of the transaction and the attractiveness, it's also not that we absolutely need it or something. It's we're well positioned in this country with the current set of businesses that we have. I think that we demonstrate that we a solid set of results also this time again. So we will be disciplined and rational in this process.
Okay. Thanks for taking my questions.
The next question is from Mr. Matthias Stivitz, KBC. Go ahead please, sir.
Yes. Thanks for taking my follow-up questions. I had one question, which I think was not yet answered on Dutch Life on fee and premium based revenues and margins. Yes, so we saw that the decline leveled off. So I was just thinking or wondering how we should think about fees going forward and also on DC and APS type of margins going forward.
And then maybe a small second question on Japan, the technical margin, which was down on lower mortality results. Yes, I guess this is this can be lumpy and change from quarter to quarter. But is there anything you could say on what you would expect in terms of normalized technical margins over time for the Japanese business, same like you did for the Dutch Life business? Thank you.
Okay. Matthias, sorry for forgetting the first question. Indeed, the fees and premium based revenues has a downward trend due to the runoff of the Individual Life portfolio, and we have seen that, as you know, quarter by quarter, we see that, that will continue. Obviously, one of the elements that we are focusing on Edenas Life is also on reducing expenses. And also important to mention that in terms of capital generation is the runoff of this individual portfolio, although indeed under IFRS results into a decreasing operating result, Ceteris Paribus, On the other hand, it's releasing capital, and that is a component of our generation for coming from Netherlands Life.
But we should not expect growth in DC or APF like low capital intensive type businesses to compensate for the declining runoff going forward or?
It will obviously depends on how the market grows and where what market share we get into the different parts of the pension business going forward. So if it is insured pensions or its pension buyouts that will support the fees and premium based revenues. If it is through the APF or pure PPI, the margin will be earned more through the management fee and therefore will be reflected in the NN Investment Partner business or through the fees that our administrator, SL, will receive. So it's somehow difficult to read how it will evolve. The important thing to highlight is that we are prepared with all the different propositions.
So either one direction or another, think we have the opportunity to capture that growth of the market. But from what we see today and the reality in our balance sheet is that we see this decrease, the downward trend in the fee and premium based revenues for the segment Netherlands Life.
Okay. And on Japan, please?
In terms of the Japanese technical margin, there is obviously some changes and but it's very much driven by the mortality and the morbidity results. However, let me highlight once more that leaving aside that volatility, the main driver of the operating result and the capital generation from Japan Life is driven by fee and premium based revenues. So yes, we can see in the technical margin some trend down. And also, even there, there could be some volatility on mortality and morbidity.
So it's
not clear as fees and premium based revenues for Netherlands Life.
Okay. Very clear. Thank you.
So I think because I think we have answered all your questions. I want to thank you for your questions. And let me conclude by saying that we are making good progress to deliver on all our strategic objectives, but we are fully aware that there is still more work to do. We are able to fully focus on improving operating performance, thanks to our strong capital position, while at the same time, we remain committed to disciplined capital management. I want to thank you for your attendance to this call and have a good day.