Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's analyst conference call on its third quarter 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 to this conference call to discuss NN Group's results for the third quarter of 2016. I will start off today's presentation by looking at the highlights of the third quarter 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 three with the highlights.
NN Group's operating results of the ongoing business for the third quarter of 2016 was EUR 319 million. This compares with an operating result of EUR 392 million 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 EUR 21 million, 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 third quarter. At the same time, NN Investment Partners was able to attract EUR 600 million net inflows in third-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 Netherlands Non-life. While the combined ratio improved to 101.8% in the third 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 EUR 298 million, driven by EUR 320 million of dividends from our subsidiaries, bringing the cash capital at the holding to EUR 2.4 billion at the end of the third quarter. The Solvency II ratio of NN Group decreased to 236%, mainly reflecting the impact of credit spread movements, partly offset by the operating return of the business. I will now turn to slide number four.
As you are aware, we made public on the 5th of October our intention to make an all-cash offer for all issued and outstanding shares of Delta Lloyd at a price of EUR 5.30 per share. We confirmed this intention on the 2nd of 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 of 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 third quarter financial and operating trends. 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 EUR 5.30 per share. In this respect, we feel that the pre-tax EUR 200 million 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 one for one or items that can be achieved on a standalone basis and therefore already are reflected in base values. Both of these cost 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 third 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. 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. Needless to say, we will update the market further if and when appropriate. In the next slide, I will talk about developments in customer services at our business units. NN Group aims to 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 third 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, NN Life's pension administrator, and NN 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 services 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 NN Life Japan's COLI products to small and medium-sized enterprises through its nationwide tied agency network. The agreement also provides a framework for collaboration on potential future product initiatives.
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 insurance channels and tied agents. Sales channels are being digitalized, leading to more efficient operations. This quarter, NN Hungary introduced an online client portal, NN Direct, which is the first 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 six. In the Netherlands, the strategy is centered around providing digital, personal, and relevant services with the aim of enhancing customer experience. 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. We are on track to reach half a million 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 third quarter for a new customer service called Prevention Scan. This service provides for an independent prevention coach to perform a comprehensive check on a 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. 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. 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 EUR 945 million in the first nine months of 2016. The operating result for the same period last year benefited from higher private equity dividends and a significantly 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 first nine 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 nine, which gives more details about the expense savings in the Netherlands. About a year ago, we set ourselves a new cost-based target in the Netherlands, aiming to reduce the annual administrative expenses of Netherlands Life, Netherlands Non-life, and the holding entities to EUR 685 million 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 third quarter of 2015. This expense reduction program is on track. In the third quarter of 2016, we realized EUR 21 million of additional cost savings, bringing the cost base in the Netherlands down to EUR 765 million 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-based target, as we have to deal with these upward cost pressures. 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 first quarter performance of each individual segment, starting, as usual, with Netherlands Life on slide 10. The operating result of Netherlands Life was EUR 178 million in the third quarter of 2016. This is a decrease from EUR 267 million a year ago, which benefited from a EUR 110 million private equity dividend. The third quarter of 2016 included a EUR 13 million 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 run-off of the individual life closed book and lower margins in the pension business. The technical margin also declined as the third quarter of last year was supported by EUR 6 million 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 EUR 21 million from EUR 24 million in the third quarter of 2015, which was supported by a private equity dividend of EUR 17 million. The combined ratio improved to 102% from 106% in the third quarter 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 two business lines within Non-life separately.
In disability and accident, the third quarter operating result decreased to EUR 25 million from EUR 32 million in the same quarter of 2015, which included a EUR 12 million 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 third quarter of 2015. The operating result in property and casualty improved to a loss of EUR 5 million from a loss of EUR 7 million in the third quarter of 2015, which included a EUR 5 million private equity dividend. This quarter reflects an additional impact from the severe storms witnessed in the second quarter of 2016 of EUR 3 million. The third quarter of 2015 was impacted by severe summer storms in both the fire and motor portfolios.
The P&C combined ratio decreased to 106% from 110% in the third quarter of 2015. Please turn now to slide 12 and the results of Insurance Europe. Insurance Europe reported an operating result of EUR 52 million for the third quarter 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 EUR 100 million in the third quarter 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 third quarter of 2015, excluding currency effects, reflecting lower mortality results. Fees and premium-based revenues increased, partly offset by higher DAC amortization and trade commissions, both driven by volume growth. The cost income ratio decreased as higher income was only partially offset by higher administrative expenses. New sales increased to EUR 209 million, up 22.6% from the third quarter 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 EUR 199 billion from EUR 197 billion at the end of the second quarter. The increase was driven by positive market performance of EUR 2 billion as 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 million net inflows in third-party assets in the third quarter of 2016. This was offset by outflows in the other affiliated business and proprietary assets. The operating result increased to EUR 38 million in the third quarter of 2016 from EUR 34 million 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 EUR 11 million in the third quarter of 2016 from a loss of EUR 23 million in the same quarter last year.
The holding result improved to a loss of EUR 30 million, mainly driven by lower holding expenses due to lower staff and IT costs, as well as timing effects. The operating result of the reinsurance business decreased to EUR 2 million in the third quarter of 2016 from EUR 4 million in the same quarter last year, driven by lower underwriting results. Finally, the operating result of NN Bank increased to EUR 17 million in the third 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 VA reported a loss before tax of EUR 13 million, compared with a loss of EUR 64 million in the third quarter of 2015, reflecting lower hedge related losses. The third quarter of this year also reflects lower fees and premium-based revenues as the portfolio continues to run off. The run off of the Japan Closed Block VA portfolio continues to evolve as expected. We do now expect NN Re in the Netherlands to release capital of approximately EUR 400 million by the end of 2019, ± 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 third quarter of 2016, which increased to EUR 2.4 billion at the end of the quarter. The free cash flow during the third quarter was EUR 298 million, which included dividends of EUR 320 million received mainly from the Dutch units. The details of the dividend substreams per segment can be found in the appendix to this presentation. During the quarter, we had capital flows to shareholders of EUR 244 million. This comprises the cash part of the 2016 interim dividend of EUR 130 million and the amount repurchased under the share buyback program in the third quarter of EUR 130 million. 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 eligible own funds, and the solvency capital requirement over the third quarter of 2016. In the third quarter, the Solvency II 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 VA, 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 second quarter of this year. The operating return had a positive impact of five percentage points. This quarter, the eligible own funds includes the net result of asset management for both the third quarter and approximately EUR 40 million for the first six months of 2016. Starting from now, from the third quarter 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 VA reference portfolio this quarter. The solvency capital requirement increases slightly, mainly due to interest and credit spread movements in the quarter.
Finally, in light of the intended offer for Delta Lloyd, the EUR 500 million share buyback program has been suspended for an amount of EUR 333 million. This amount of EUR 333 million continues to be deducted from own funds at the end of the third quarter. We may add this amount back in the fourth quarter if the share buyback continues to be suspended and depending on the status of the Delta Lloyd transaction at that time. With that, I will pass you back to Lard for the wrap-up.
Yes, thank you, Delfin. I'm on 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, 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 in 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. We will update the market at the appropriate time. I would now like to open the call for your questions. Can I kindly request you to limit the number of your questions to two 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. With that, I would like to hand back to the operator for organizing the Q&A.
Thank you, Mr. Friese. Ladies and gentlemen, we will start the question and answer session. To register for the Q&A, please press star one on your telephone. As a reminder, in the interest of time, we kindly ask you to limit the number of questions to two. Your questions will be answered in the order that they are received. Please press star one for your question or remark. Go ahead, please. 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? That's the first question. The second question is about your extremely strong APE premiums in Japan Life for the EUR 209 million APE due to the launch of the new product in July. Is that a kind of one quarter effect, or could we, for the next couple of quarters, expect quite elevated APE premiums from this successful product launch? Could you also highlight a little bit something about the profitability IRR or referred cost of capital, how profitable that product is? That were my questions.
Yes. Thank you very much, Cor. 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. We remain open for constructive and more substantive dialogue. We do see the merits of this transaction. We aim for recommendation. I'm not going to speculate on any potential outcomes of this. On the growth in Japan, yeah, 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 is a well-positioned business in the SME market segment in Japan. You do know that sales are, of course, seasonal.
It is traditionally the highest in the first quarter, 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. 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. I certainly also believe that the Sumitomo long-term partnership will help to strengthen also the further penetration in the market segment. We have signed the partnership in the third quarter. We aim to start 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.
In that sense, good sales momentum, and we expect also the sales momentum in the future to continue on the back of the developments I just mentioned.
Okay, wonderful. Thank you.
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 highlighted credit spreads and then sovereign 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? 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 first quarter, 3%, 3.5% in the second quarter, adjusting for some of the one-offs, and now 4%, taking out the asset management profit. I know it's volatile, so did 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.
Thank you, Arjan. The first question will be taken by Jan-Hendrik Erasmus, and the second question by Delfin. Jan-Hendrik, over to you.
Thank you, Lard, and good morning, Arjan 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. To answer your question, Arjan, yes, EIOPA updated the VA reference portfolio from the 30th of September. The impact on our VA was around two basis points, and this is in the number. The impact on our Solvency II ratio was less than three percentage points.
Delfin, maybe the capital generation?
Yes. 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 fund forms, 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. Within the operating return, we have highlighted every quarter what are the most relevant one-offs in order to provide some more clarity on what you could perceive as the main capital generation in that particular quarter. I would not like to extend too much in order to what I have explained in previous calls that this capital generation varies from one quarter to another.
I think that in the third quarter, we have highlighted EUR 40 million of one-offs related to the fact that it includes the net profit of asset management for the full nine months of the quarter. As I said during the presentation, going forward, we will include them only on a quarter-per-quarter basis. That should provide more stability there. If you were to exclude that, we are approximately on the EUR 200 million of operating return in the quarter. As I said, there is nothing particularly exceptional apart from what I said for asset management. Let me insist again, every quarter will depend on the starting position of the Solvency II balance sheet. 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.
Yeah. Hi, good morning. I just have a couple of questions. Delta Lloyd is still a bit confusing, what's going on. You've clearly 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. That's number one. Secondly is, can I get some color about this cash flow that you're getting from your back book. At nine months level already, you have got EUR 1.2 billion cash from subsidiaries to the holding company. What is the right level on an annual basis? I.e., what are one-offs in first nine months? What is a recurring number we should think about? Is it still around a EUR billion number, or should we be penciling in a bit more than that? Thank you.
Yes, Ashik, good morning. Let me take the Delta Lloyd question, and then I'm going to ask Delfin to take your question on the cash flows from the back book. As I said earlier, I'm not going to speculate on what will or will not evolve. 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. 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. As a result, we think 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 aim for a sustainable dividend pattern and distribution of capital to shareholders in the form of dividends. We gave guidance 40%-50% of the net operating earnings of the ongoing businesses. Any excess cash that comes out over time, beyond our ambitions and that we cannot deploy over time, we will get back to shareholders in the form of dividends or buybacks, et cetera. That approach to value creation does not change. With that, maybe Delfin, cash flow from back book.
Yes. 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. 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 run-off of individual portfolio, although there is some pressure on the investment margins and so on, to maintain more or less the dividends. As you have seen so far, a relatively stable flow from dividends from NN Life in the last quarters has been EUR 150 million, plus EUR 10 million of the interest on the subordinated debt. We do believe that going forward, there is going to be some stability within the dividends from Netherlands Life.
Non-life asset management will depend, not in a particular quarter, there is going to be variance from one quarter to another, but overall, similar to 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 run-off portfolio. Obviously, for Japan, in the Japan Closed Block VA, we flag that we had around EUR 400 million still of solvency capital requirement that will be free up from now to 2019, therefore that is going to come later. Then in Europe, of 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, particular from Belgium, they are a bit elevated due to the run-off of the portfolio there.
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. Lard, 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? Netherlands Life sprang to my mind, I may be wrong on that, or there may be something else that was in your mind. Secondly, the Life technical margin. It was EUR 30 million in spite of the EUR 8 million low yield charge. The cleaner figure was closer to EUR 40 million, 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?
Was there something else that was helping the Netherlands Life margin that I should not extrapolate? Thank you.
Thanks, William. Good morning. On your question with regard to the synergies. The following. We've done our own outside-in analysis on the cost synergy potential. Given Delta Lloyd plans to cut cost to EUR 530 million, themselves identified already a large proportion of the cost with low to very low synergies. I indeed think that the EUR 200 million would represent a high proportion of what I would call the addressable cost base. That's how I look at it. That's what I have to add to this. Maybe now, Delfin, over to you on the technical margin.
Yes, William. We have indicated in the past that the technical margin in Netherlands Life is volatile from quarter to quarter. It's difficult within that volatility to provide a clear guidance, but also we have mentioned in the past to be approximately between EUR 30 million and EUR 35 million per quarter as a run rate. We believe that trend still holds with some trend downwards due to the runoff of the individual closed book. There's some pressure on margins. Apart from that, I think as you did notice that the unit-linked guarantee provision was negative. We had to increase the provision by EUR 8 million, impacting, as I said, negatively the technical margin. That was also similar to what happens in the third quarter 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 the EUR 2.2 billion 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. Maybe you could share something on how sensitive or what kind of an impact this could have on the operating return. My second question is on the Netherlands Life business. On the fee and premium-based revenues, they continue to level off compared to the last three to four quarters. The margin is also stabilizing at around 40, 45 basis points. Just wonder 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 APF 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. 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 one quarter to another. Actually, we had in very much whatever the impact you could have expected as an indication when we were looking at the second quarter because the spreads move in one direction. Then in the third quarter is a relatively similar impact, but in the opposite direction. In any event, it's not that helpful for the fourth quarter because we don't know in which direction that will move again. From that perspective, that's why we keep referring to the medium-term guidance.
Is there a material change in the component of the operating return between excess spread on the one hand and technical margin or expense margins on the other? I'm struggling a bit because in Q1, the underlying number was around EUR 100 million if we exclude the impact from the transfer from separate account to general account. Now it's around EUR 2.2 billion despite lower rates since the year-end balance sheet that was used for the Q1 numbers. Is there anything you could share on the drivers or the breakdown of that number?
Sorry, Matthias. Specifically, which number are you referring to? Sorry, I did not understand you well.
Yeah. Let's take it maybe offline.
Okay.
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.
I think that in the operating return, obviously, an important element is the investment margin. 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 II balance sheet position. It is also the new business, the operating variances. 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. Of course, the contribution from Japan Life Asset Management and the pension funds. There is a lot of ingredients into this big pot of operating return. There is nothing special or particular that I would flag in terms of improving or deterioration in terms of the technical result.
Okay. Thank you.
The next question is from Mr. Bart Horsten, Kempen & Co. Go ahead please, sir.
Yes. Good morning, all. Two questions. One on the investment portfolio. Could you give an update on where you stand regarding the re-risking of the portfolio? To what extent is the 114 basis points, which you published in Q3, is that the new run rate based on the re-risked portfolio? 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? To your non-life activities. We see good progress in D&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.
Yeah, thanks, Bart. This is Lars. Let me start with the non-life area, 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. At 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, et cetera. 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. Breakeven combined ratios are, in fact, in excess of 100%, because we have a calculation method where we don't include the investment income there. Even if we would run that book around 100%, we would still be making good money.
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. Some of these targets are more challenging than others, but our commitment remains the same. 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 3 Q combined ratio was 96.8%. That's an improvement over the same period last year. You've seen already also in the last quarters, apart from the first quarter, where we had some elevation, a decent run rate of the D&A combined ratio evolution. If we look then at the other piece, it's property and casualty.
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 rates of combined ratio of that fire business year to date is around 98%. 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 arduous work. It's a combination of underwriting improvements, pricing, repricing of books, cutting and culling product lines in motor that we don't feel are, over the long term, profitable.
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. We do have the past claims that need to be settled, and we will have some runoff results coming through. They at a certain point will subside. 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 by the end of 2018, and we still have time to get there.
More work to be done there. Delfin, over to the investment portfolio.
Yes. 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, and that was between 100, 105 basis points. The reality is that we have had higher, as you said yourself, investment margins. For the third quarter, the last 12 months is 114 basis points. Obviously, keep in mind that does include some of the high private equity dividends that were received in the previous quarters as part of the last 12 months. 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 first nine months of the year, we invested more than EUR 2 billion in mortgages. It was a lower amount within the third quarter. That increases to give you the percentage that mortgages represent over the total investments of the group is around 12.5%. 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. Steven Haywood, HSBC. Go ahead please, sir.
Good morning, everyone. A few questions, please. The Q4 dividend remittance is upstream. Are there any businesses, not seasonally, that usually upstream in the fourth quarter, aside from the ongoing quarterly dividend you're receiving from Netherlands 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 a benefit on your expenses? You gave the FIRE combined ratio year-to-date. Could you give some motor combined ratio year-to-date, please? Thank you.
Yes, Steven. I'll ask Delfin to take your first two questions. In the meantime, we'll get you the motor combined. Which I can already give you. The motor combined for the nine months is 113.7%. For the nine months. Yeah, year-to-date. Delfin, the first two questions.
Yes. From the different segments, Netherlands Life, I commented on it before. Generally speaking, there is no particular seasonality there. In the fourth quarter, one should consider more or less the same evolution that we have had over the year. Usually, for 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 fourth quarter. Investment Partners, again, with different levels, we do expect dividends to come. There is the Japan Closed Block VA, that again, is sort of gradually decreasing, so there's no particular reason of having a special seasonality there.
Also, I bring you the attention to the transaction that was done with NN Re in Ireland, on which we do expect to have a EUR 65 million dividend approximately coming from Ireland that will be coming in the fourth quarter. In terms of the hybrids. Tier 1, there is not really a market there, so it's more likely that we will refinance it with Tier 2.
Thank you very much.
Ladies and gentlemen, if there are any additional questions, please press star one. For any additional questions, please press star one. The next question is from Mr. Ashik Musaddi, JPMorgan. Go ahead please, sir.
Hi. Sorry, just again, one question I have. 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, et cetera. Any thoughts on those restructuring, where we are at the moment? I guess you have released some capital from Belgium, but any update would be good from Belgium and Spain and any other businesses. Thank you.
I think, Ashik, 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 two units that you have mentioned or any other at this point of time.
Okay. Thank you.
The next question is from Mr. Alan Lyons, UBS. Go ahead, please.
Yeah, morning. I was just wondering, it's been six 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 a head? I know the AFM filing is due by the 28th of December, 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. Indeed, we need to make sure that by the 28th of December, that's the time before that or the time that we have to file a draft of a memorandum to the AFM. There's multiple things ahead. While we do appreciate the merits of the transaction and the attractiveness, it's also not that we absolutely need it or something. We're well-positioned in this country with the current set of businesses that we have. I think that we demonstrate that we have a solid set of results also this time again.
We will be disciplined and rational in this process.
Okay. All right. Thanks for taking my question.
The next question is from Mr. Matthias de Wit, 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 Netherlands Life on fee and premium-based revenues and margins. We saw that the decline leveled off. I was just thinking or wondering how we should think about fees going forward and also on DC and APF type of margins going forward. Then maybe a small second question on Japan, the technical margin, which was down on lower mortality results. I guess 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 Netherlands Life business. Thank you.
Okay, Matthias de Wit, sorry for forgetting the first question. Indeed, the fees and premium-based revenues has a downward trend due to the run-off of the individual Life portfolio. We have seen that quarter by quarter, and we see that will continue. Obviously, one of the elements that we are focused on in Netherlands Life is also on reducing expenses. Also important to mention that in terms of capital generation is the run-off of this individual portfolio, although indeed under IFRS, results into a decrease in operating result. Et cetera, the portfolio on the other hand, is releasing capital, and that is a component of our capital generation coming from Netherlands Life.
We should not expect growth in DC or APF, like low capital intensive type businesses to compensate for the decline in run-off going forward?
It will obviously depends on how the market grows and what market share we get into the different parts of the pension business going forward. If it is insured pensions or it's 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 any investment partner business or through the fees that our administrator, AZL, will receive. 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. Either one direction or another, I think we have the opportunity to capture that growth of the market.
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. On Japan, please?
In terms of the Japanese technical margin, there is obviously some changes, 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. Yes, we can see in the technical margin some trend down, and also even there could be some volatility on mortality and morbidity. It's not as clear as a trend as we have told for the fees and premium-based revenues for Netherlands Life.
Okay. Very clear. Thank you.
Ladies and gentlemen, if there are any additional questions, please press star one. For any additional questions, please press star one.
I think we have answered all your questions. I want to thank you for your questions. Let me conclude by saying that we are making good progress to deliver on all our strategic objectives, but we are fully aware 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.