Earnings Transcript for NNGPF - Q1 Fiscal Year 2019

Operator: Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's Analyst Conference Call on its First Quarter 2019 Results. The telephone lines will be in listen-only mode during the Company's presentation. The lines will then be open 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 solicitation of an offer to buy any securities. Good morning, Mr. Friese. Over to you.

Lard Friese: Thank you, operator. Good morning, everyone. Welcome to our conference call to discuss NN Group's results for the first quarter of 2019. I will start today's presentation by talking about the highlights and the business developments in the past quarter. And then Delfin Rueda, our Chief Financial Officer, will take you through the details of the financial performance and talk about the free cash flow and the capital position of the group. After wrapping up the presentation, I will open up the call for Q&A. Our Chief Risk Officer, Jan-Hendrik Erasmus, is also with us today to answer your questions. Let me start with the highlights shown on Slide number 3. The year 2019 has started off well with NN Group reporting an operating result for the first quarter of €468 million. This is up from €313 million in the first quarter last year, which, as you will remember, was impacted by a large storm in January. The Netherlands Life, Netherlands Non-life and Japan Life segments all posted improved results this quarter. In addition, we reduced administrative expenses by €20 million, bringing total cost reductions achieved to date to €310 million. At the same time, we saw some pressure on the results in Europe at the Asset Management and the bank. Delfin will discuss the details of the financial results later in the presentation. In terms of capital, our Solvency II ratio of 213% remains at a strong level, albeit down the end of last year. But please note that the ratio was impacted this quarter by unfavorable movements in credit spreads and interest rates, the full deduction of the €500 million share buyback and the lowering of the UFR to 3.9%. The holding company cash position and cash capital position stands at €2 billion with €269 million of dividends received from subsidiaries in the first quarter. We saw a strong increase in new sales to €945 million, up 72% at constant currencies compared with the same quarter last year. The insurance businesses in The Netherlands, Europe and Japan all contributed to this increase. So let's now move to Slide number 4. One of our priorities is to improve the performance of our business units while continuing to help customers secure their financial futures. We do this by launching innovative new products to meet the evolving needs of our customers. We also continue to implement a range of measures to improve the financial performance of our Non-life business. This includes premium increases across the different product lines as well as improved claims handling. As I already mentioned, we saw a strong increase in new sales in the first quarter of the year and Netherlands Life new sales increased 92% on a higher volume of group pension contracts. And sales in Japan more than doubled on the back of strong sales efforts as well as customer expectations of a revision of tax rules for COLI products. The National Tax Agency in Japan recently published proposed new tax regulations which will reduce the tax deductibility of certain COLI products. These changes will only be applicable to new sales. While sales will be held back in the short term, we expect the changes to be favorable for the persistency of the existing in-force book. In line with the industry, we have suspended the sales of certain COLI products and are currently adapting a product offering to the new tax regulations. We operate in a heavily regulated environment and often have to navigate changes in local markets like the tax changes in Japan that I just mentioned. Recently, certain changes were also proposed to the pension systems in Romania and Poland. We have extensive experience in both the European and Japanese markets and have been successfully coping with such regulatory changes for many years now. We do this by differentiating ourselves in these markets through an excellent customer experience, continuous product innovation and diversified distribution. Let's move to the next slide, Slide number 5. We continue to increase efficiency across the organization. For example, by integrating teams and simplifying the IT landscape by substantially reducing the number of applications. In the first quarter of the year, we reduced the expense base of the business units in the scope of the cost reduction target by an additional €20 million, bringing the total cost reductions to €310 million compared with the 2016 full year expense base. We are making good progress towards our target of reducing the administrative expense base by €400 million by the end of 2020. Having said that, I would like to caution again that expense reductions will not be linear and that some units may see some expense increases in the coming quarters to support growth and make necessary investments. And with that, I will hand you over to Delfin Rueda. Delfin?

Delfin Rueda: Thank you, Lard, and good morning, everyone. Let me start with NN Group's operating result for the first quarter of 2019 of €468 million, which is up from €313 million in the same quarter of 2018. There are a couple of non-recurrent items influencing these results. The first quarter of 2018 was impacted by a storm in January for a total amount of €89 million. And the first quarter of this year benefited from a €63 million dividend from an indirect stake in the former ING Life Korea. The first quarter net result was €512 million. There are a few items below the line that I would like to highlight. Firstly, the non-operating items mainly reflect positive revaluations of derivatives and private equity. Also, the result before tax of Japan Closed Block VA was minus €10 million compared with plus €15 million in the first quarter of 2018 mainly due to negative hedge-related results. The line acquisition intangibles and goodwill includes the recognition of negative goodwill of €33 million on the acquired Czech and Slovak Aegon businesses as well as lower amortization of acquisition intangibles. And finally, special items, which mainly relate to restructuring expenses incurred in respect of the cost-reduction target were down from €79 million to €52 million in the first quarter of this year. On the following two slides, I will take you through the first quarter performance of the individual segments. As you are aware, we have changed our segment reporting this quarter and now show the results of the bank as a separate segment for the first time. The results of Japan Closed Block VA are no longer reported as a separate segment but included in the segment Other. As usual, let's start with Netherlands Life, which reported an operating result of €268 million, up from €212 million in the first quarter last year, mainly driven by the €63 million dividend that I mentioned before. The first quarter last year included a dividend of €7 million from the same stake. The current quarter also reflects lower administrative expenses as well as lower fees and premium-based revenues. The operating result of Netherlands Non-life improved to €29 million. On the one hand, we saw a lower underwriting result in D&A mainly due to an unfavorable claims development in the individual disability portfolio. However, the results in P&C were higher reflecting more favorable claims experience and lower administrative expenses, partly offset by a €9 million impact from a storm which mainly hit Belgium in March 2019. The result for the same period last year was, of course, impacted by the January storm. The Non-life combined ratio improved to 97.9% compared with 106.3% in the first quarter of 2018 or 98.6% if you exclude the impact of last year's storm. The operating result of Insurance Europe decreased to €58 million from €71 million a year ago, which included a €9 million of non-recurring benefits. Lard already mentioned the pension reforms in Romania and this had an adverse impact on the current quarter results. On a net basis, the acquired Czech and Slovak businesses had a limited positive contribution to the operating result. The operating result of Japan Life was €94 million (sic) [€84 million], up 23% from the first quarter of 2018, excluding currency effects, reflecting the contribution of the higher COLI sales. I will now move to Slide 9. The operating result of our asset manager decreased to €36 million from €41 million in the first quarter of 2018. Fees continue to be under pressure in the asset management industry. However, we are partly compensating these with expense reductions. Total assets under management increased to €260 billion, mainly on the back of positive market performance. We also saw some asset inflows, including net new third-party assets. The operating result of Banking was €30 million in the first quarter, down from €33 million last year. The lower interest result was partly compensated by lower administrative expenses. Finally, the segment Other includes the results of the holding company and the reinsurance business. The results of Japan Closed Block VA are also reported in this segment but below the line. The operating result of the segment Other improved to minus €36 million from minus €78 million in the first quarter of 2018, which included a €33 million negative impact of the storm in the reinsurance business and non-recurrent items of minus €15 million. On Slide 10, I would like to talk about our cash capital position. The holding company cash capital remained stable at €2 billion at the end of the first quarter of 2019. The free cash flow during the first quarter was €183 million, driven by €269 million of dividends received from subsidiaries. This was partly offset by the consideration of €102 million paid for the Slovak businesses acquired from Aegon as well as €38 million of shares repurchased under the €500 million share buyback program that we commenced in March. To finalize my presentation, I will take you through the developments in NN Group solvency on Slide 11. NN Group's solvency ratio was 220% at the end of the first quarter of 2019, before the deduction in full of the €500 million buyback program that we announced in February. After the deduction of the buyback, the ratio was 213%, down from 230% at the end of the previous quarter. The operating capital generation for the first quarter added five percentage points to the ratio. Note that as from this quarter, we deduct the accruals of qualifying debt from the operating capital generation. Let me remind you that this amounts to approximately €160 million per annum. The SCR operating return reflects a lower contribution from Japan Closed Block VA, in line with expected runoff, as well as higher sales in the insurance entities. Market variance lowered the ratio by nine percentage points. Credit spreads had a negative impact mainly due to the tightening of corporate bond spreads to which we are underweight compared with the reference portfolio. Lower interest rates were also unfavorable for the ratio, partly offset by positive equity revaluations. Finally, the category Other includes the negative impact of the reduction of the UFR by 15 basis points in January this year as well as the update of the reference portfolio. I will now pass you back to Lard for the wrap-up.

Lard Friese: Yes, thanks, Delfin. NN Group has started the year well, posted an operating result for the first quarter of €468 million. We continued to strive to improve performance of all our business units and increase efficiency throughout the organization. Our balance sheet remains strong with a cash capital position of €2 billion and a Solvency II ratio of 213% at the end of the first quarter. Going forward, our focus remains on successfully integrating Delta Lloyd in The Netherlands and Belgium as well as on further driving growth and improving the customer experience through innovation and our client-centric approach. Now let me finish by mentioning that we plan to hold a capital markets update in The Netherlands on the 4th of December 2019. I will now open the call for your questions. Operator, over to you.

Operator: Ladies and gentlemen, we will now start the question-and-answer session. [Operator Instructions] And the first question is from Mr. Cor Kluis, ABN AMRO. Go ahead please, sir.

Cor Kluis: I'm Cor Kluis, ABN AMRO. I've got a couple of questions, first of all, about the Japan COLI business. Can you please update on the possible earnings outlook or earnings impact of this tax change is showing, of course, that you will sell less of this specific product, taking into consideration that you had mid- to high single-digit growth target or outlook for the Japanese Life business? And related to that, on dividend upstreaming from Japan, it could -- it might help a little bit to increase the upstreaming if you sell a little bit less products there. Could you also give an idea of the expected different upstreaming from Japan in 2019? And yes, second question is about the Asset Management business. We see that the fee -- the revenues is somewhat less in Q1 than it was in Q4. I think despite the fact that the AUM, yes, has been rising somewhat, I think the average is also a little bit higher. Why is that commission income or fee income somewhat lower than we -- than I thought? And last question is about the roll forward of the Solvency II on Slide 11. In the category of Own Funds Other, we see a minus €0.1 billion. And that, of course, includes two large minuses, €60 million, I think, probably from Slovak and €240 million from the UFR so around €300 million from minus. So there should be a plus also of around €200 million in it. What is the plus included in the Own Funds of Other of under just €200 million approximately? Those are my questions.

Lard Friese: Thank you very much, Cor. This is Lard. So first, I'll address your -- the discussion on Japan. As Delfin mentioned, and I mentioned as well already in my opening remarks, we're very pleased to report a strong quarter out for Japan. The exceptional sales results were a combination -- driven by a combination of two things

Delfin Rueda: So thank you, Cor. So starting with your question on the fees. Yes, you're right that, of course, one has not to look at the balance of assets under management at the end of the period, but you know the average, but I think you have looked into that already. And the reason for the decrease in the fees is, in the one hand, the reflection of the ongoing fee pressure but also the composition in -- on the assets under management. And also, there was some replacing in one particular contract. But that is basically a reflection of pressure on the lower fees in general. On the Solvency II roll forward, on the Own Funds movement in the segment Other, very -- there is a positive which is in relationship to the change in non-available Own Funds and that is related to, in particular, Belgium, on which the Solvency Capital Requirement has increased due to some rerisking there. And with that, the amounts of transitionals, we could use for the purpose of group consolidation increase. So that is one of the positives within that bucket.

Operator: The next question is from Mr. Ashik Musaddi, JPMorgan. Go ahead please, sir.

Ashik Musaddi: Just a couple of questions. First of all is on M&A. I mean recently, there has been a bit of noise about you looking at rework, which is not an old story, and secondly, around Castle as well, this managed insurer. Now I guess you won't comment on any speculation, but can you just remind us about your M&A discipline? What sort of ROI shall we be expecting? Will it be based on 1-year ROI, 2-year ROI? I mean, when do you plan to achieve those things? So any thoughts on your discipline on M&A would be great. Secondly, I mean, if I noticed that the cash flows -- the cash flow to holding company was a bit lower, was actually not there in the P&C business, Dutch P&C, so what is the reason for that? Because you still delivered decent results in P&C. And thirdly is around same P&C. The combined ratio was 98%. Would you remain comfortable with that number for the rest of the year? Any thoughts on that would be great.

Lard Friese: Thanks, Ashik. I'll take the P&C business and M&A. And then Delfin, would you be so kind as to comment on the cash flow to holding? So let me first talk about the M&A question you had. May I remind everyone that our main priority is to build our business out and focus on improved earnings, et cetera, on an organic basis, so that's where our priority lies and that should be well understood. And when it comes to M&A, it's all a situation where opportunity meets discipline. And we have -- we are looking -- we're always looking for opportunities to strengthen the business with a priority on markets where we already have a business. There is no template to hurdles we have to this because we don't believe there's a template to M&A. It's all opportunity-driven. We have a set of financial and non-financial criteria, which we are very, very disciplined in adhering to. And we want to make sure that we understand the business as well and that we also are paid for potential risks that we're taking. So in that sense, there's no template for this, but discipline is, of course, absolutely critical here. When it comes to P&C, let me -- so first of all, I'd like to mention that -- and we all know we're on a program to improve structurally our P&C business and our Non-life business towards our target of 97% or below. Now the good news is that we're seeing progress as we implement all our measures on the underwriting side, on the efficiency side as well, so the expense ratio side. And this is the fourth consecutive quarter now with a combined ratio below 98%, so I think that's encouraging. But there's still a lot more work to do. So the -- we are continuing to improve our underwriting. We're continuing to push through re-pricing where necessary. And we are continuing to build out a capability using data analytics, et cetera, to be able to consistently build a company that has a strong earnings profile longer term. That's our objective with this. And we're also obviously not finalized and finished with the efficiency program that we have there as well. We saw this quarter a little bit of an elevation in the D&A business, which we are mindful of, and we're monitoring that closely, taking measures to address it. So we just continue the course towards our target of building a business which is structurally below 97%.

Delfin Rueda: I think -- so on your question on the lower dividends or lower cash flows to the holding, particularly from P&C, well, if you compare the remittances of this quarter with those of the same quarter last year, actually it is slightly above that level. And also in the first quarter of last year, there was no dividend coming from Property & Casualty, so nothing special to mention here. Obviously, we pay dividends out of our subsidiaries based on their profitability but also in terms of their excess capital over their levels. So I think you should expect dividends coming from Non-life according to the profitability and evolution of their share capital going forward. As you know, usually the second quarter tends to be higher in terms of remittances, dividends coming from the subsidiaries and there is always some seasonality there.

Ashik Musaddi: I just have one follow-up question on M&A, sorry to go back to that topic. I mean do you have any preferences for P&C, Life or Asset Management or you're a bit agnostic on that, it's just about the returns?

Lard Friese: It's -- again, our priority is on organically building out our business. But if there are opportunities for us to strengthen the business through M&A, we will look at it and evaluate it. And those things are always with a priority on existing markets and if we can strengthen the business in particular markets. But I would say it's always opportunity-driven. So it could be P&C, could be Life, could be -- everything that would be a good thing to do, which we apply against our strict financial and non-financial criteria, which we will evaluate if it makes sense. And if it doesn't meet it, we don't.

Operator: The next question is from Mr. Matthias De Wit, Kempen. Go ahead please, sir.

Matthias De Wit: Two questions from my side, please. First is on the Banking business. You report again pressure on NII, similar to what you've seen in the past. I've noticed that mortgage spreads are recovering, so just wonder whether you see trough in -- or an inflection point in NII, also considering the volume growth we've seen during the quarter. So that's question one. And then secondly on Insurance Europe, regarding the acquisition of Aegon's business, I just wonder how big the contribution was of that operation. If I remember well, it used to be profitable under Aegon's ownership, so is that still the case also? And what do you expect for this business on a full year basis?

Lard Friese: Delfin?

Delfin Rueda: Yes. Matthias, thank you for your questions. On the Banking, I think depending on competitive environment and what is the absolute level of interest rates, the new production of mortgages can have a slightly higher or lower interest margin there. Our bank is mainly a mortgage bank and, therefore, very much dependent on the rates for mortgages. And over time, and that's not new for the whole industry, we have seen competition, severe competition and actually with the decrease of interest rates, the margins decreasing, and that's what you have seen reflected in this quarter as well. In terms of the acquisition of Aegon business, I think I can -- I assure you that there has been a positive contribution in the quarter. We're saying it has been moderate because it was also a relatively small transaction in itself and, therefore, you can only expect a moderate contribution per quarter. There is also another factor to take a bit into account, which is the fact that, that -- and this is a bit technical, but with the acquisition on the day one balance sheet. We recognized some negative goodwill that, of course, result into a capital gain in the moment of the acquisition, which has been flagged in the press release. And that, of course, is recognizing profits earlier and has a bit of a downward pressure on the actual contribution in the quarters to come. But still, we are very comfortable. Of course, it's very early days for the integration of the two activities, but we are confident on the double-digit return that we consider when pricing this transaction.

Operator: The next question is from Mr. Johnny Vo, Goldman Sachs. Go ahead please.

Johnny Vo: Just a couple of questions. Just obviously, you've grown quite strongly in the group pensions business in The Netherlands. So can you tell us what the new business margin for that business is? And also, can you just give us an outlook in terms of is this a one-off or is -- are conditions improving, such that you think the flow of new business is going to be at this level?

Lard Friese: Yes, Johnny. First of all, the -- first of all, the -- this business is a bit seasonal in the sense that it depends each year what -- from the history of how these pension contracts has been contracted in the past, whether you have a big year of clients who are renegotiating their next period, if you will, or whether you have a more muted year. So your existing in-force book and the expiration of contracts, which need to be up for renewal, can be bigger or smaller any given year. And this particular year, it was a strong renewal season, as we call it, so that means many contracts up for renewal, and we were happy to be quite successful in it. The focus that we have with all these renewals is on the VNB and making sure that the business that we are renegotiating, that in the pricing, the margins exceed the cost of capital. Now the -- oftentimes, these contracts move from defined benefits into defined contribution, which is a completely different product obviously for the accruals that will come for the employee benefits that they have for their employees. And why? Because, to a large extent, the lower rates and longevity pressures are repricing an existing defined benefit product into a new contract duration is very high and, therefore, companies often choose to go to the defined contribution. So margins are lower but the capital allocated to that defined contribution is also much lower obviously as you don't take the market risk. So again, we're pricing above our cost of capital for this but there is a pressure on the margins as a result of many of the clients choosing to move to defined contribution rather than defined benefit products.

Johnny Vo: Okay. So it's fair to say the margin is around zero, is that fair? Or a little bit above?

Lard Friese: No, it's a bit above.

Operator: The next question is from Mr. Farooq Hanif, Crédit Suisse. Go ahead please, sir.

Farooq Hanif: Just returning to Japan COLI. Can you just give a little bit more information on what is happening with tax? And some of your peers have commented that they should be able to replace it if they can adjust the product. I mean, is that going to be possible? And related to that, what do you think -- so what do you think the potential is for you to kind of reduce your earnings growth ambitions for Japan over time? I mean do you stick by your earnings growth guidance there?

Lard Friese: Yes, Farooq. So let me expand a bit on Japan. First of all, what has -- what is happening now is something that in the last 33 years that we're there with the business has happened before. So we've had -- we've seen multiple periods at which -- multiple occasions at which tax regulation around the COLI products have changed. And what you see happening usually is that after an adaptation process, the underlying need, of course, does not change, and as a result, you adapt your products and you move on. And that's basically what we expect here to happen as well. Now what has happened is that there were -- the new rules are saying that there were some changes that impact certain type of products with high cash surrender values, while other products on the COLI space, which were also carrying our products that are not affected by these new rules. So as I said, it's an adaptation process where we are currently in. We are experienced in this. We have done this before. What we expect, as I said earlier on an earlier question on the call, is that this adaptation process takes a bit of time. So on the short term, we expect sales to be held back. At the same time, we believe that we're very well positioned for the longer term. And also on the earnings side, please note that there is -- that these new tax rules are basically an encouragement for persistency in the book, which means that, that is an offsetting factor which actually improves the potential earnings outlook. So I think these things and how they will completely move in the earnings side on the IFRS is something that we need more time for to assess. When it comes to the J GAAP earnings, which are important because those are basically determining the dividend capacity that you have, if you have a period of held back sales, your J GAAP earnings as a result of the business strain will be -- will improve, and as a result, your dividend capacity will actually also improve. So in that sense, it's a bit of puts and takes here, an adaptation process, which we've done before, we're very well positioned for this. The underlying need of the SME customers has not changed. So -- and to see how the IFRS side exactly works out, we just need a bit more time to see how the market shapes up.

Operator: The next question is from Mr. Robin van den Broek, Mediobanca. Go ahead please, sir.

Robin van den Broek: Two questions from my side. The first one is in relation to the bank distribution agreement with ING. I was just wondering, ING, of course, went into a partnership with AXA, and I was just wondering how comfortable are you in most of your regions where you do work with ING that those bank distributions will be up for renewal. I think most of those are in 2024, so it's still a bit further out, but I think some will also lapse earlier. So any commentary there would be helpful. Second question is more relating to the UFR. I mean due to the euro swaps curve move year-to-date, your solvency is obviously down. But I also guess the benefit from the UFR is -- has grown quite a bit year-to-date. I'm just wondering if you remeasure your UFR drag on a quarterly basis or do you do that on an annual basis? And I was wondering if you could give us a little bit of quantification on how much the UFR drag has basically gone up year-to-date.

Lard Friese: Yes. Thanks, Robin. So I'm going to ask Delfin to take care of the UFR discussion. But before that, the bank distribution arrangement with ING. Yes, at the time of the IPO, we have basically renewed all our existing bank distribution agreements with ING. Market-by-market, slightly different, but I would say on average, 10 years' duration. The relationships that we have with ING on the distribution side in the markets locally are very good. And in that sense, it's going well. ING indeed has partnership with AXA in a number of markets, but those are markets that we are not present. So in that sense, we have comfort and also confidence in the way that we work with ING already for a very long time in the markets where we've built a collaboration. On the UFR dynamics, Delfin?

Delfin Rueda: Yes. Thanks, Robin, for your question. Absolutely, when the benefit of the UFR is every quarter resulting into -- and we monitor of what is what we call the UFR drag. We also, of course, look at other components of changes every quarter, including the risk margin [release], which is very substantial and very important. And actually, one tends to be compensated to a large extent by the other, so we do still have the net of the two effects are negative, an impact in terms of negative. And indeed, as the UFR reduces, the UFR benefit is lower, and we have seen already some improvement on the lower UFR drag. Every quarter, it changes because the benefit, of course, depends on the ultimate level of interest rates. And -- but maybe as a rule of thumb, what you could think is that whenever there is a change on the UFR down that we expected to happen every single year by 15 basis points for -- at least in the next years, that we expect that to earn that back through higher capital generation over a long period of time, I would think between 10 and 15 years.

Operator: The next question is from Mr. Andrew Baker, Citi. Go ahead please.

Andrew Baker: So just three for me, please. So appreciate it's early but are you able to provide an initial view on the potential impact from the EIOPA's 2020 long-term guarantee package reviews, specifically around any movement at the last liquid point? Or if there's any other positives or negatives that you're aware of at this point? And then secondly, on integration, are you able to provide an update on the operational progress? So I know on the Non-life side, you were originally going to -- from 44 systems down to 19 and presume via the Life migrations as well. Have those migrations started yet? And if not, when are sort of the largest migrations scheduled to happen? Said another way, when is sort of the operational risk associated with the integration going to be at their highest over the next couple of years? And finally, just on Netherlands Life. So typically, on the fee and premium-based revenues, it's seasonably higher in Q1. But if you look at it this quarter compared to the last couple, that didn't really come through. Does this mean there's a step-down in expectations in this line going forward? Or is that something specific to Q1?

Lard Friese: Yes, so let us do it this time with the three of us. So the first one on EIOPA, Jan-Hendrik. Then I'll comment on the operational side of the integration. And Delfin, can you then do the discussion in Life? So first, Jan-Hendrik, over to you.

Jan-Hendrik Erasmus: Andrew, yes, of course, we've noted EIOPA's review of the Solvency II framework. And that's exactly what it is, it's a framework, so it has lots of components in it, and we would caution against trying to isolate the impact of one element above another. What we would say is that it's a package and it's really too early to gauge the final effect of -- impact of this on our business.

Lard Friese: The integration. The integration is progressing well. A couple of comments on it. You've -- we always report on all the financial side around this, and you know that we're progressing well towards our €400 million expense reduction target with €310 million already behind us. And the target needs to be achieved by the end of 2020, so we're well on our way. When it comes to the status of the integration, we have -- all the legal mergers have taken place at the end of last year. The large operating legal mergers have also taken place. The internal model expansion that was quite important to us has been approved by the end of last year by our regulators. So basically, all big milestones have been achieved. When it comes to all the application rationalization and the decommissioning road map and stuff like that, we are ongoing on this. This is not going to start. It has already started and we're on this. In the last quarter, I think we sunsetted roughly 30 applications, to give you an idea, a little bit over it in fact. But it's something that takes time. This is step-by-step every month, every quarter. Our teams are working toward a situation where the IT landscape is simplified. We're also using the opportunities where we can to improve technology to make our processes also longer term, more flawless and more efficient. And this is a step-by-step process that we're taking in a very diligent and disciplined manner. So we can -- it's already started a while ago and it's going to take a couple of years to get that right. And by the end of 2020, we aim to have achieved most of it. Then on the Life, the fees and premium-based revenues.

Delfin Rueda: Yes. Andrew, on the fees and premium-based revenues, the -- we have flagged in the past the trend for this to decrease. The main driver of that is, I would say, two aspects. The first one is, of course, the runoff of the individual Life closed book that you are very much aware of, a, but also the lower margins in the pension business as it moves from defined contribution -- from defined benefit into defined contribution. Of course, you know the fees and the revenues is significantly lower and that is reflected within this line. Of course, I mean that's a trend that we have identified very early on. We have given some guidance in terms of maintaining the operating result stable. And that's why we are doing other activities like reducing the overall expenses and working on our investment portfolio in order to compensate that trend.

Operator: [Operator Instructions] And the next question is from Mr. Jason Kalamboussis, KBC. Go ahead please.

Jason Kalamboussis: I had -- my questions are the following. The one is on Asset Management. You had an upstream of €44 million last year. And this year is about, yes, it's €22 million. So just want to have an idea what drives the difference and if this is excess capital, so any comments would be great. The second thing is on Asset Management. Do you find that what we are seeing on the results, is it more a consequence of the Q4? So i.e., are you more optimistic about second quarter? And will that, at a certain stage, translate into a review with potential for you to look for acquisitions in this area or to look at what you can do? And the third question is just around M&A. In the follow-up question-and-answer you gave earlier, you said that, Lard, you said that the priority was on existing M&As which I still remember that you were saying that you knew your priority is in existing markets. So how do you think about if, for example, you go to a new market and the papers have been talking about Spain, doing a large deal in another market would effectively preclude you for a while to be able to grow in your existing markets? So what are your thoughts on this?

Lard Friese: Yes, let me first talk about your last question or you want to do that first, Delfin? We'll take them one by one. So Delfin will talk first about the first one. I'll come back later.

Delfin Rueda: Yes. Thanks, Jason. I think it's the other way around, so that in the first quarter of last year, we have remittances of €22 million from Asset Management. And this quarter, it is €44 million in the quarter. And of course, what drives it is also the -- not only the profitability but also the level of capital and solvency that this unit has.

Lard Friese: Yes. Jason, on Asset Management, first of all, Asset Management is a business model, which, as you all know, is operating in a difficult environment globally. So the recipe that our NNIP, our investment partners group, is following and implementing is a recipe of focus, focus and focus. The first one, focus on the emphasis on certain investment strategies, investing in those and honing those even further. Secondly, a focus on relentless client service and aligning the distribution efforts and sales efforts to the need for the investment strategies that we're focusing and placing emphasis on; and thirdly, efficiency, which is all about reducing expenses, et cetera. So that's just what they do. And this quarter was encouraging with the positive flows this quarter also for the total but also for the third-party business, which is good. On M&A, in general, as I said earlier on the call, we focus on organic growth. That's where our efforts are. If we find an opportunity, we'll look at it. It's opportunity -- it's opportunistic so in the sense that we judge it at its own merits. And we have a priority and that priority is for existing businesses, for existing markets, because we believe -- for the obvious reason because we understand it, we can potentially benefit from synergies and scale, et cetera. So that's why we have a priority there. So what about new markets? Not a priority for us today.

Jason Kalamboussis: If I could just follow up on the NNIP. Don't you find that exactly because of the pressures that you're seeing in the industry, and you can see it in headlines everywhere, that you would help the unit by looking at potentially adding more in there and do smaller scale acquisition? Or it's not something that you find is necessary at this stage, you prefer just for the unit to remain focused on what they are doing and it's something that you would consider but at a later stage?

Lard Friese: As I said, we're focused at our -- our primary focus is organic, right? And for the asset manager, it's fighting day -- every day for focus, focus, focus, as I just said, on the strategies, emphasis that they have on expenses and efficiency and on client service, et cetera. That's where the focus is. And just like any other business that we have, if there is an opportunity to strengthen the business inorganically, we'll look at it at its own merits and assess it against very strict financial and non-financial criteria. And if it makes sense, we act. If it doesn't make sense, we don't. That's how we look at it, but our focus is on organic activity.

Operator: There are no further questions, Mr. Friese. Back to you, please.

Lard Friese: Thank you very much, operator. And more importantly, thank you, everybody, for being on this call today. And let me conclude by saying that 2019 has started off well for us. However, we remain focused on delivering on our strategic priorities and on creating long-term value for all our stakeholders. I want to thank you for all your questions, and I wish you all a pleasant day.