Earnings Transcript for NNGPF - Q2 Fiscal Year 2019

Operator: Good morning ladies and gentlemen, this is the operator speaking. Welcome to NN Group's Analyst Conference Call on its Second Quarter 2019 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. Delfin Rueda, Chief Financial 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. Rueda, over to you.

Delfin Rueda: Thank you very much operator. Good morning, everyone and welcome to our conference call to discuss NN Group's results for the second quarter of 2019. Following Monday's announcement that Lard Friese has stepped down as CEO of the company, I will take you through today's presentation covering the highlights, business developments, and financial performance in the past quarter. As usual, our Chief Risk Officer, Jan-Hendrik Erasmus is also with us today to answer your question. Let me start on Slide 2. We have today reported an operating result for the second quarter of 2019 of €445 million. The measures we have taken at our non-life business are visible in the improved results of that segment this quarter. The Insurance Europe and Japan Life businesses also posted higher results compared with a year ago despite some regulatory headwinds in those regions. At the same time, the results on Netherlands Life were lower versus last year, largely due to lumpy private equity dividends of €55 million in the second quarter last year. And the reinsurance business showed some higher claims. I will go into the details of the financial results of each segment later in this presentation. Total expense savings to-date under our cost reduction program amount to €306 million, I will talk about this on the next slide. In terms of capital, our Solvency II ratio stand at 210%, down slightly on last quarter, reflecting the deduction of the 2019 interim dividend of €0.26 per share that we have announced today. The holding company cash capital position is currently at €2.2 billion with €558 million of dividends received from subsidiaries in the second quarter. The quality of our new sales translates into a higher value of new business. Value of new business increased to €236 million in the first six months of 2019 from €205 million in the same period last year. Successfully integrating Delta Lloyd and improving efficiency across the organization remain key priorities. We continued to migrate Delta Lloyd products to the targets platforms and the commission systems when this is completed. On the Slide 3, you can see that total cost reductions achieved to-date at the units in the scope of the integration amount to €306 million compared with the 2016 full year administrative expense base. This represents a small increase of the cost base this quarter. We are committed to reducing the cost base by €400 million by the end of 2020. However, as we have guided in past quarters, expense reductions will not be linear and some units will see expense increases to support their growth plans and make necessary investments. Slide 4 shows the value of new business and new sales volume in the first half of the year. Our business continue to develop innovative products and services that meet the needs of our customers. In the first six months of 2019, our commercial performance was strong with an increase in both new sales and in value of new business compared with the same period last year. The revision of the regulations of the tax deductibility of certain COLI products, which was announced by the Japanese National Tax Agency early this year led to high sales in the first quarter, but low sales in the second quarter after we suspended sales of these products. Our Japanese unit is adjusting its product portfolio to meet the requirements of the new tax rules and was the first player to launch new COLI products in July. In addition, the continued focus of Japan Life on the sale of protection products resulted in a 30% growth in Protection VNB during the first six months of 2019. Let me now move to the financial performance, starting with NN Group's operating result, which you can see in the chart on the left hand side of the slide 5. The operating result amounted to €445 million from the second quarter of 2019. This compares with €508 million in the same quarter of last year, which benefited from €69 million of private equity dividends and non-recurrent items versus €4 million this quarter. The right-hand chart shows the net result for the second quarter of €606 million versus €463 million in the same quarter of 2018. The increase was largely driven by higher non-operating items, which reflect a mix of items, including positive revaluations on derivatives, real-estate and private equity, as well as gains on the sale of government bonds. Special items relating to restructuring expenses and other project related expenses were lower than a year ago. The amortization charge on the intangible assets that we acquire on the Delta Lloyd transaction is also running down in line with the amortization schedule. On the next two slides, I will take you through the second quarter performance of the individual segments. Starting with our largest unit, Netherlands Life in the left-hand chart. The operating result was down on a year-ago, reflecting a lower investment margin as the second quarter of 2018 benefited from total private equity dividends of €55 million versus €4 million in the current quarter. In addition, the technical margin was lower due to unfavorable mortality results this quarter, while fees and premium based revenues continue to trend down given the run-off of the closed book and lower margins on the pension business. As I already mentioned, we are seeing continued improvement in the performance of the non-life business. The combined ratio improved to 95.8% from 97.9% in the second quarter last year. The higher operating result in Property & Casualty reflects an improved claims experience, partly offset by higher weather related claims. In the Disability & Accident book, we saw a favorable claims development in the Group income portfolio, while unfavorable claims experience in the individual disability portfolio was covered by internal reinsurance with NN Re. The third chart shows the operating result of Insurance Europe, which was up on a year-ago, partly driven by non-recurrent items. We also saw higher performance fees in Slovakia and a small positive contribution from the acquired Czech and Slovak businesses. This was partly offset by lower pension fees in Romania, following the pension reforms in that country. Finally, on this slide, the operating result at Japan Life was up over 15% from the second quarter of 2018, if you exclude currency effects. The higher technical margin reflects better mortality and surrender results this quarter, while DAC amortization and trail commissions were down, driven by lower premiums and lower surrenders. On the other hand, fees and premium-based revenues were lower reflecting the sales suspension of certain COLI products that we mentioned earlier. The other segments are shown on slide 7. Starting on the left, the operating result of asset management was broadly stable at €40 million reflecting lower fees, partly compensated by a decrease of administrative expenses. Total assets under management increased to €268 billion at the end of the second quarter of 2019 from €260 billion at the end of the first quarter, mainly reflecting positive market performance, partly offset by net outflows. The banking business saw a drop in its operating result, mainly due to higher additions to the loan loss provision, although this remain at a low level in absolute terms. Operating expenses were higher, which is supporting an increase in mortgage origination. And finally, the segment Other, which includes the results of the holding company and the reinsurance business. The holding result remained stable compared with a year ago and the lower results of the reinsurance business reflect claims related to non-lives disability portfolio, as well as a large claim from our legacy portfolio. I will now move on to the free cash flow on slide eight. The cash capital position at the holding company was €2.2 billion at the end of the second quarter of 2019, up from €2 billion at the end of the first quarter of 2019. The free cash flow during the second quarter was €546 million, driven by €558 million of dividends received from subsidiaries in all segments. This was partly offset by capital flows to shareholders of €373 million, representing the cash part of the 2018 final dividend and shares repurchased in the second quarter and the share buyback programs. On the next slide I will take you through the developments in NN Group Solvency position. NN Group Solvency II ratio was 213% at the end of the second quarter of 2019, before the deduction in full of the 2019 interim dividend of €0.76 per share. After the deduction of interim dividend, the ratio was 210% versus 213% at the end of the previous quarter. As you can see in the chart, the operating capital generation for the second quarter added 5 percentage points to the ratio. Let me also remind you that as from the first quarter this year, we deduct the accruals of qualifying debt from the operating capital generation, which amount to approximately €160 million per annum. Lastly, market variance lowered the ratio by 5 percentage points this quarter, reflecting movements in credit spreads, lower interest rates, higher mortgage spreads and positive returns from equity. To wrap up, NN Group has today reported a good set of results for the second quarter of 2019. Commercial momentum is strong, as evidenced by higher sales, a higher value of new business in the first six months of the year. Our capital position remains strong, with a cash capital position of €2.2 billion. The Solvency II ratio stand at 210%, after deduction of the interim dividend announced today of €0.76 per share to be paid in September. In the second quarter of this year, we took steps to expand our position in the Dutch Non-life market with the acquisition of HCS, as well as the announcement to acquire VIVAT Non-life. We are currently working to finalize the requirements to be able to close the VIVAT transaction early next year. Finally, I would like to take this opportunity to mention that we recently celebrated our fifth anniversary as a listed standalone company. In the past five years, we have strengthened our leading position in the markets where we operate. With a focus on being a company that truly matters in the lives of our stakeholders. And this is thanks to the efforts and dedication of all our employees. Together we have ensured that NN is well positioned for the future and fully committed to helping our customers secure their financial futures. And with this, I will pass the call to the operator to start the Q&A session.

Operator: Thank you, sir. Ladies and gentlemen, we will now start the question-and-answer session. [Operator Instructions] 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. [Operator Instructions] And the first question is from Mr. Ashik Musaddi, JPMorgan. Go ahead please, sir. Mr. Musaddi, your line is open. Go ahead please.

Ashik Musaddi: Hello. Can you hear me? Can you unmute it? Unmute it. Hello. Can you hear me?

Delfin Rueda: Yes, we can hear you.

Ashik Musaddi: Yes. Sorry. Hi, Delfin, Ashik here. Just a couple of questions. So, one is with respect to the interest rate. I mean, interest rates have gone down straight line. So how should we think about your cash flows basically? Can you just remind us how well you're hedge on the cash flows? Has anything changed over the past one year in terms of whether you are still hedging the cash flows, or you are focusing on hedging the solvency ratio? Should your cash flows be impacted in the near future, at least, say three, five-year view, because of the falling interest rates. So that's number one. Secondly, I mean, given that interest rates have gone down straight line again, I mean, how do you think about your group pension and individual life business? In past, I remember that you flagged that you want to maintain a flattish group pension business. But with this interest rate environment, do you think you will be able to maintain a flat? Or should we be expecting runoff in group pension as well, which will generate more cash flows at least in the near term? And thirdly, with respect to European cash dividends, it looked a bit lower at €125 million. I mean, I thought that the range is about €200 million. So, what happened there? Thank you.

Delfin Rueda: Thank you very much. I will leave Jan-Hendrik the opportunity to answer the first question, and I will cover the other two. Jan-Hendrik, please.

Jan-Hendrik Erasmus: Hi, Ashik, thanks for the question. Yes, rates have come down quite a bit and also this quarter we saw our own funds increase and our SCR increase, as you would expect. We are still hedging on a best estimate cash flow basis. So, we -- where the curve is steep and liquid, we try to match assets and best estimate liability cash flows. Of course, we don't hedge where there aren't any good assets to hedge or there we accept bigger mismatches, so that's at the very long end of the curve. And the way we think about it is that we try to of course limit our sensitivity to rates to the less than 10% that we've disclosed tolerance for plus or minus 50 basis points. So, we see that. And we're not hedging the ratios specifically more than that, except as keeping it within our tolerances.

Delfin Rueda: Then Ashik, on the impact of interest rates on the prospects of our individual and pension business going forward, I think it's clear that our individual life portfolio is in runoff, is closed so the changes on interest rate does not affect that. In terms of the pension business, and I think that's what you’re referring to individual and group pension business, the need of people to build-up for their pension is there, and therefore the prospect for that business going forward is clear there. We actually show a very strong level of renewals in the first quarter of the year. And in July, we also announced our pension buyout which was important and significant in terms of its size, which shows our commitment to the pension business, and also that volumes even with low interest rates, could develop in a nice manner. Obviously on the individual front, the low interest rates only put further pressure on employers for making the defined benefit that pensions are very expensive, and as a consequence they move to defined contribution is expected to continue, for which we believe we are well positioned. In terms of the dividends for Europe, when you compare the dividends of the second quarter of this year with last year, you see that, particularly in Europe, as you highlighted, we have less dividends coming from Belgium and also last year -- in the second quarter of last year, we had some additional release of excess capital coming from Spain. Nevertheless, as you can see due to diversification of our dividend sources. You've seen some increase in the dividend come in this quarter from Japan, but also the bank has grown a significant dividend contribution of €56 million this quarter. I hope this answers your three questions.

Ashik Musaddi: Hello, can you hear me?

Delfin Rueda: We can hear you now. Yes. Not before.

Ashik Musaddi: Yeah, sorry. No, just a follow-up question on -- to Jan-Hendrik. I mean how should we think about the cash remittances from the Dutch Life business for -- in the near future, I mean unless there is any specific asset allocation shift that sector. I mean should we expect stable cash remittances or do you think that this falling interest rate might impact the cash remittances from the Dutch Life business?

Jan-Hendrik Erasmus: Thanks, Ashik. No, I mean in our business and capital plans, we see stabilities, so nothing significant to report on there. It is true that lower rates of course puts pressure on our operating capital generation through the UFR drag, but there are also offsetting effects like the risk margin and the shift to high-yielding assets you mentioned yourself.

Ashik Musaddi: Okay, thank you.

Delfin Rueda: Yeah. Just to add what Jan-Hendrik has said, I mean, keep in mind that our Dutch business, -- Life business and Life is currently at solvency ratio of 212% and we have maintained various stable evolution of remittances coming from Netherlands Life and we expect that to continue in the future.

Ashik Musaddi: That's good, thanks.

Operator: Your next question is from Mr. Benoit Petrarque, Kepler Cheuvreux. Go ahead please, sir.

Benoit Petrarque: Yes. Thanks for taking my questions. The first one will be on Japan, now that you have a bit more details on the impact of the new tax deductibility on the COLI. So, could you provide a bit of guidance on the sales and earnings going forward in Japan? Also tell us what you have seen so far in the month of July with your new product. If you're able to recuperate some of the lost sales going forward, so a bit of granularity around that? And also we've seen – obviously, it was expected that Japan Life is paying a dividend. What is the outlook in terms of dividends paying capacity of this business? So that's the first question. Second one was on the market impact in the second quarter. So, a bit less -- lower than expected, could you provide us a bit with kind of the moving parts in terms of impact in volatility hedges to mortgage spreads and rates? And also what you see in the third quarter on the Solvency II, and what is the volatility adjusted benefit at the end of Q2? I guess it's much lower than we have seen in the past, but also an update there will be useful. Thank you.

Delfin Rueda: Thank you, Benoit. I will cover the first question and Jan-Hendrik will elaborate on the second one. The new tax rules in Japan were implemented as of July and as we all know that has a very significant impact on the sales in the first quarter and then we stop the sales of the COLI products with high surrendered values. We've been the first one to launch -- relaunch three products in Japan and covered in part of your question is this has been recently down. Therefore, it is very early to know what the impact of this will be. In any event, it is fair to say that the sales will be lower going forward until the market adapt to the new situation. The focus over the last year has been an increase in sales in protection products on which we've seen very good growth over the last quarters, both in terms of the percentage that represent over the total as well as the contribution to the value of new business. The sales will be down, we also have to keep in mind is that surrenders are expected to be lower that is going to protect somehow the profitability of this segment. And the one positive aspect of having less pressure on capital in Japan due to the lower sales, means, that the dividend capacity from Japan increased. Nevertheless, we have the policy in order to basically have more of a gradual evolution of dividends as it come forward.

Benoit Petrarque: On the sales, you said down, I mean, how much you have in mind actually? Is that…

Delfin Rueda: It is difficult to say, but it will be significantly down, because the volumes that we reached in 2018 and certainly in the first quarter of 2019 were very elevated even when you compare it with the previous periods. So we saw a period of very high growth of sales and a significant part of the business like approximately 70%, 75% were related to products more dependent on a high surrender. So these are the areas that have been adjusted and therefore sales will be relatively down. Of course, the surrenders will be lower and that will have a positive impact also in the deferred acquisition cost, but also on the technical result. So the impact on the profitability won't be as accentuated as the reduction in terms of sales. In any event, in terms of value of new business, the protection products have contributed significantly more than the so called Financial Solutions products and we have seen that already in this quarter and we expect that to actually continue and increase going forward. With that, maybe I'll leave it to Jan-Hendrik to answer the second question.

Jan-Hendrik Erasmus: Hi, Benoit. Yeah. So markets lowered the ratio by five percentage points this quarter, which reflected movements in credit spreads, lower rates, higher mortgage spreads slightly lower inflation and positive returns from equity and real estate. So credit spreads was negative, of course, mainly due to the decrease in the VOLA, which went from 14 basis points to nine basis points in the quarters, so minus five basis points, and we also saw some widening of the mortgage spreads by close to almost 20 basis points, which negatively impacted our ratio. Now rates, as we have said, also decreased quite a bit in the quarter that increased Own Funds and SCR as you would expect, but the impact on the ratio was perhaps a bit better than you would expect outside in, because the shift wasn't a parallel shift at all durations. And maybe finally the one to flag is at equity, we -- also equity markets went up in the quarter and that also helped our ratio a bit.

Benoit Petrarque: So far in Q3, what do you see?

Jan-Hendrik Erasmus: Yeah.

Benoit Petrarque: You’re ready further down probably.

Jan-Hendrik Erasmus: Yeah. Q3 I see some pressure on the gov spreads and also rates down quite a bit quarter-to-date. So that will be put some pressure -- downwards pressure on the ratio. Yeah.

Benoit Petrarque: Thank you very much.

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

Farooq Hanif: Hi, there. Thank you very much. Just going back to Japan, I noticed that your -- kind of the payout ratio in a sense of the dividend has gone up a lot in Japan and obviously, there are good reasons for that, given the lower strain that you're talking about. But just kind of wondering going forward, whether this will be a theme, you're talking about sales not picking up that quickly, just could you give us some sort of -- some discussion on, where you think that payout ratio is going to go, in relation to the net result, net operating result? Secondly, I realize that you've played your Investor Day, for very good reasons. Does that mean that sort of really made decisions on things like capital return are also likely to be delayed? And related to that as well, one of your peers, have talked about the increasing private equity interest, in DB books, in the Netherlands. Can you comment on that too? I mean the potential for reinsuring, part of your DB book for example. Thank you.

Delfin Rueda: Yes. Thank you very much. Let me start with your last two questions, which I think, are easier to answer. If I got to say that, in terms of the capital markets update I think, it is quite normal, after the appointment of a new CEO, that the intention of David is basically to have the opportunity to engage actively with all the stakeholders, including of course you guys, in the coming months. And as a consequence, we have decided to reschedule to the Capital Markets update to a bit later meet the next year, in order to provide the opportunity to do that, with a bit more time. In terms of the defined benefit books or closed books in general. I certainly should not comment on what others say or plan to do. We are focused on the integration of Delta Lloyd. And also in finding further efficiencies with the operations on the systems of our closed books and that is the current priority. And that is supporting us in reducing the expenses. And will help us to open, other opportunities and alternatives, as the one that you mentioned, in the future, as having more a strategic value to us. But for the time being, our focus is on improving and consolidating the administration of these books internally. And future will tell about the rest. In terms of the payout ratio, to be fair, I don't understand what are you referring to as payout, ratio.

Farooq Hanif: Sorry, what I -- I mean, if you look at, I think the dividend obviously at €79 million, its higher proportion of your earnings in Japan that has ever been.

Delfin Rueda: Okay. Sorry for that.

Farooq Hanif: Okay.

Delfin Rueda: The dividend from Japan is -- keep in mind, that also, as we said before, we want to maintain some regularity, in terms of the dividends. Last year was a bit typical because of the need of doing a particular strengthening of reserves in the Japanese GAAP. The driver for the dividends, let me remind you, is not the IFRS profits, but is the Japanese GAAP profits. And as a consequence, the Japanese GAAP don't have the same pressure, due to lower sales on the contrary. When sales decrease, that is because of not being able to capitalize acquisition expenses, usually the Japanese GAAP earnings are under pressure when we sell more. So as a consequence, I think, in terms of the dividends from Japan, the remittances from Japan, I think the guidance that I've given you of maintaining stability of dividends is the best guidance I can give you.

Farooq Hanif: Thank you very much.

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

Matthias De Wit: Hi, good morning. My first question is on Insurance Europe, can you provide me the contribution of the acquisition of Aegon's Czech and Slovak activities during the quarter? And secondly, on non-life, I noticed it's already first quarter with decent underwriting results. Is this sustainably below target now? Or is it too early to say that? And can you say anything on pricing, now that VIVAT is about to disappear from the market. And then lastly on capital generation, in the operating bucket, the €0.3 billion, if I strip out the bank, would that still be close to €0.3 billion then? And can you say anything on the capital generation, on what to expect going forward now that rates have declined, but also considering the spreads widening we've seen in mortgages? Thank you.

Delfin Rueda: Good, thank you very much, Matthias. I think quite a few questions here. So let me go one by one. So contribution from Aegon, Czech and Slovak, we mentioned that there was a small modest contribution from these activities. This will -- expected to increase further over time. But also keep in mind that at the time of the acquisition of these two -- actually three operations, because also there were life and pension in Slovak. There was a significant amount of profits recognized upfront and this was through the negative goodwill that was reflected in Q1 of €33 million. So some of the profits you like under IFRS had been recognized upfront in any event the contribution is going to increase going forward. Still we are pleased with the progress we have done so far in terms of the integration, and it's of course still early days and we are comfortable with the guidance we gave of double-digit return on the investment. For Non-life, certainly we are very pleased with the evolution so far of the combined ratio of Netherlands Non-life. This quarter it benefited from a strong result in Property & Casualty across different portfolios and also the favourable development of the Group income. We flagged in the press release that we also saw some higher claims in individual disability, which were covered by our reinsurance arrangement with NN Re, and therefore, you see if you like a combined ratio for Disability & Accident a bit better, you like that what is the overall impact within the Group, but you also see the negative of that coming through the segment Other under NN Re. We have seen already for quite a few quarters, a combined ratio below 98%. I think it has been five consecutive quarters and yes, we see some sustainability on -- not at the level of 95.8% that I mentioned before, because that is a certain element of the reinsurance with NN Re. But I think that all the effort that has been made over the last months in terms of improving the Non-life business is coming through. Difficult to comment on pricing, certainly in this type of calls, but you have seen that whenever it is necessary and the portfolios require it, we have been proactively reacting to that. Capital generation, the answer is yes, even if you exclude the dividend from the bank, the rounding will be still at €0.3 billion, so that means that, of course, the €0.3 billion that is presently reported is very close to the €350 million this quarter. Capital generation, going forward, we could have been discussing that for long, but I know already that I'm standing myself a bit too long with my answers, but I think is, we all know that with lower rates, there is a headwind in our capital generation due to the higher UFR drag, but at the same time please do keep in mind that we have some levers to improve the capital generation that has been already been shown in the capital generation over the last quarters. To mention a few of them, is they move to higher yielding assets that can be very substantial, improvement in the Non-life results, and also including the expected acquisition of VIVAT Non-life in next year, the profitable new business that is being written in Europe and dividends come in, as you know from the bank. As a matter of fact, if you can see that our operating capital generation as a whole during the past quarters despite the falling rate environment has been relatively stable and when I look back to the last eight quarters, since the acquisition of Delta Lloyd, the operating capital generation has been quite stable and contributing around five percentage points per quarter. So on that sense, low interest rates are not welcome, but there are other aspects that make us feel confident to the future.

Matthias De Wit: Okay. Thank you, Delfin.

Operator: The next question is from Mr. Bart Jooris, Degroof Petercam. Go ahead please.

Bart Jooris: Yes, hi. Two questions from my side. This is the second quarter in a row that your private equity dividends are very low. How confident are you that there is going to be some catch-up in the second half that we will see a more normalized level over the year? And then secondly, in your special item there were project costs, are those projects more or less finished and some of them are on the implementation of IFRS 17. Could you give some guidance of what the impact of IFRS 17 will be now that you have done those projects?

Delfin Rueda: Yes, thank you Bart. Private equity dividends fluctuate a lot, but it's not right that this is the second quarter in a row, because in the first quarter -- last quarter, we actually have €63 million of private equity. So, in relationship to what happened in Q2, the timing is changed. So in relationship to 2018, in 2018 the first quarter has very little private equity and the private equity came in the second quarter, this year the private equity in the first quarter…

Bart Jooris: Was the first quarter mainly in Korea instead of private equity?

Delfin Rueda: A part of it was Korea, but there was also private equities included there. What I'm saying is that, it varies from one quarter to another and as a consequence, you have to just look at the overall timing of these coming. Keep in mind that that doesn't mean that the evaluations of private equity in the quarter have not occurred. But that comes below the line, sometimes you've got the appreciation on the private equity as non-operating and then when our dividend is paid is being translated into the operating result. Special IFRS 17, in terms of the guidance for IFRS 17, it's still quite early in order to indicate any effect of it. So, we know that the implementation will take place. So we expect to take place as of January 2022 and that's going to have some important implications in terms of the balance sheet, but also the P&L. In terms of the cost, let's say that this quarter we have approximately €10 million, of course, but this will fluctuate. We'll continue to have some special items for the rest of this year and next year mainly, maybe a few -- a little bit coming into 2020, in 2021 as well, but we have not provided an overall estimate of that cost so far.

Bart Jooris: A small follow-up on, still on private equity, you talk about valuations, but mostly, if I'm not mistaken the dividend comes from deal flow. Do you see less activity in deal flow for the moment than we had last year or is this just plain volatility?

Delfin Rueda: I think you know the -- I mean, it is very difficult to predict the deal flows and just because in one quarter. It's not only deal flows, it's also when the private -- the vehicles that owns the private equity, sometimes they received dividends from the companies they own and these dividends are dividend out to that ultimate shareholders or owners. So it's not only deal flow, but we have a portfolio between €800 million, €900 million invested in private equity and we do expect over time to this portfolio to provide a good return similar to what could be expected for this type of investments.

Bart Jooris: Okay. Thank you very much.

Operator: The next question is from Mr. Albert Ploegh, ING. Go ahead please.

Albert Ploegh: Yes, good morning. Yes, sorry to come back to the questions raised also already on the capital generation. But can you maybe help us out a little bit what's the annualized increase of the UFR drag is in 2019 so far? And can you remind us, what the amount was in the capital generation of 2018? Second question is on reinsurance, you mentioned in the press release claim on legacy portfolio, I think it's probably about €10 million or so. But can you get maybe a bit of color on the duration of that portfolio and should we see this really as non-recurring or could this pop up going forwards as well? And the final question is on asset management, I know this is an outflow in third-party asset of €2.4 billion is used in concentrated mandate that has been lost or is it more spread across different mandates? Thank you.

Delfin Rueda: Thank you, Albert. First question will be handled by Jan-Hendrik; I will cover the other two. Please Jan-Hendrik.

Jan-Hendrik Erasmus: Hi, Albert, I mean the UFR decreased by 15 basis points again in January and we expect it will keep decreasing by 15 basis points, so every time it decreases, of course it results in higher capital generation going forward. On the other hand, when rates go down that increases the benefit we get from the UFR. We've given a sensitivity on the UFR adjustment with 15 basis points in our sensitivities which we published again today. And as a rule of thumb and this has to be a rule of thumb, because it depends on lots of things like the level of rates and the shape, but we will earn back the negative own funds impact through high capital generation in approximately 10 years to 15 years. It's tough for me to give you a precise figure, because again it depends a lot on market conditions, but what I can say is that the net impact of the UFR drag and the risk margin release in the operating capital generation was negative in 2018 and also in the first half of 2019, of course, we are also able to do other things like shifting increasingly to higher-yielding assets such as loans, mortgages and real-estate to partly offset that effect.

Delfin Rueda: And Albert, on the reinsurance claim, this is a portfolio of – we are participating, this is our legacy business that came from the time where also Voya was part of the Group, and this covers U.S. mortality risk and we are participating in a pool of reinsurance – of reinsurers and this can be quite volatile. So some quarters you have very little claims, and then suddenly there is one, or several debts with relatively large claim amount. And so it can be quite volatile. It can be going up and down. Since the inspection of this contract, it has been basically not a breakeven, so not making losses or gains, but it will continue to give us some quarters, a good results in reinsurance, or a bit of bad results, it's difficult to predict, but could be recurring, will be recurring. In terms of the outflows that you referred to, these are very specific because we saw some positive inflows of assets under management, but these were two clients actually, one, which hold for decisions related to their own strategic thinking. One of them transfer a number of funds that we will manage to their new -- newly created Management Company, so they decided to in-source the asset management of those assets. And the other basically was another U.S. client that decided to shift from active management to passive. And therefore they shift were mandate with them to passive. So, unfortunate, but very specific for these two cases. Assets under management increase by €8 billion over the quarter, but this was driven by the positive market performance.

Albert Ploegh: Thank you for the extra color.

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

Johnny Vo: Yeah. Hi, again, I just – I'm not sure whether you answered this question, but it's just in relation to the group pensions, I know that you wrote a lot of volume in Q1 and it's less volume in Q2, but certainly over the half-to-half it's quite a lot, so it would appear that the – can you tell me what the margins are on that product? And clearly, the Q1 volumes, which is very large that would be – I guess, on a mark-to-market basis negative margins, is that fair? And also, could you just give me a mark-to-market on the solvency of the Dutch Life entity, given where rates have gone from 212%? Thank you.

Delfin Rueda: Yes, thank you very much, Johnny. Yes, large volumes in the first half of the year, more to do with just the maturity of these pensions, because these are renewals and therefore it comes to you like in batches and just 2018 came with the largest number of pensions to renew. In terms of margins, it's difficult to just be too precise about it. Overall, the group pension is providing some value of new business relatively flattish in general and that basically means that we are able to not only cover the cost of equity, but also be able later on over time to have the release of the risk margin that is not reflected in the value of new business. In terms of the mark-to-market of the Solvency II ratio, it's a very tricky and complicated question to answer. And then Life Solvency II ratio is 212%, there are different elements moving that along and that is the solvency ratio that takes – that we should focus on. Maybe Jan-Hendrik, you might add something on this.

Jan-Hendrik Erasmus: Yeah. Thank you, Johnny. Just to add to Delfin, I think quarter-to-date, we've seen rates come down and govy spreads widen a bit. We've also seen in mortgage spreads widen a bit. So, definitely, I would say some downwards pressure on it. But also still robust, if you consider the starting level of 212% and like the group, the Dutch unit also has some sensitivities and tolerances and these are not very different. So that gives you an idea that it's a relatively stable, it's downwards pressure, but not significantly so.

Johnny Vo: Okay. Thank you.

Operator: The next question is from Ms. Fulin Liang, Morgan Stanley. Go ahead please.

Fulin Liang: Hello. Thank you. I just have two questions. One is actually a follow-up to Johnny Vo's question. On the – your Dutch pension business, so it seems like the margin has been compressed and just wonder, did you actually compromise your pricing discipline for the commercial consideration or is that some other things going on there, and that's the first question. And then, what is the tipping point for you to say okay, that's the minimum margin we have to keep on writing the new business and that's the first one. And then second one, it seems like -- one thing I really quite can't figure out is apparently some of your peers have had negative impact from the widening mortgage spreads, which you also have a very large actually mortgage book. But you are well -- you are managing it very well. I just wonder is that because of the hedging strategy you're taking, or is it because of the internal model techniques in the Solvency II you're able to cope through that? Thank you.

Delfin Rueda: Thank you, Fulin. I will cover the first two questions and Jan-Hendrik will talk about the impact of the mortgage spreads. For the Dutch pension business, as for all the business that we do, we keep our financial discipline. Obviously, you always need to look at commercial implications or cross-selling for their products and everything else, also the potential for transfer of pension to define contribution later and other business that we have with companies. Nevertheless, you asked about the tipping point. The way that we look into this business is, the tipping point is the value of new business, we don't write business with negative value of new business and from there, there are different connotations about how much of additional profitability you need to get on top of that. With this, I think Jan-Hendrik, please.

Jan-Hendrik Erasmus: Yeah. Thank you, Delfin. The mortgage spreads, I mean I can't comment on other companies, but what I can tell you is that we saw our mortgage spreads widen by 17 basis points in the quarter, which had a negative impact on our ratio of around 3 percentage point, so that was in line with our expectations. And if you saw this quarter, again, we've seen a slight widening of the mortgage spreads by just less than 10 basis points, but that's sort of quantum I think it's still well within our overall tolerances that we disclosed for our sensitivities. And just for clarity, maybe to mention that in the sensitivity we disclosed on corporates that includes fixed income investments, as well as mortgages. So you can see that in the appendix of our publication today.

Delfin Rueda: Thanks, Jan-Hendrik. Maybe just to add that, of course, the other side of the coin is that with mortgage spreads increasing, that help us originate mortgages with higher spreads that help our profitability going forward.

Fulin Liang: Thank you.

Operator: The next question is from Mr. Jason Kalamboussis, KBC. Go ahead please.

Jason Kalamboussis: Yes, hi, Delfin. Just on mortgage, the flow out, could you consider just providing like some of your peers specific sensitivity to it? And now on a couple of other questions, on the combined ratio it was good combined ratio, but of course it was part of it that was bit shifted to NN Re. So, a bit two questions within it. One, it is the disability combined ratio was actually if you take back, but let's say, which moved to the reinsurance was above 95% a bit high. Now, we are -- we can understand that they are bad quarters once in a while, but in general, I would have expected probably that to come every two years, whereas we had one such quarter last year, so could you let us know a bit of the trends in there and what is there to stay so bit longer sick leave or in the individual disability specific issues there? And the second part of the question is on the reinsurance side. Does it make more sense to actually not retain that much and to do that only when you are going to be delivering stellar combined ratios at 95%, so because it keeps coming again as well but will get hit on the non-life it goes and we receive it through internal reinsurance. Thank you.

Delfin Rueda: Thank you very much, Jason. So on the question of the combined ratio for Disability & Accident, yes, you're right and that's why we have provided this information. The combined ratio for Disability & Accident will be actually around 95% if you were to take the amount of loss transferred to NN Re. So, still at 95% is a relatively good level. And then for the total non-life, if you want to do the same adjustment that we will be actually around 97% combined ratio. In terms of the trend, actually individual disability is difficult to predict on a quarter-per-quarter basis, it's very volatile and no doubt there is some pressure as we have seen in the industry as a whole an increase in the average duration of sick leave for the company's sick pay schemes. But also we've seen some increased claims related to burn-outs, that's part of the industry. We monitor that very closely, perform regular pricing studies and have adjusted pricing when required. In terms of the reinsurance, the majority of the volatility that we told before was related to these legacy, US Life legacy portfolio that has nothing to do with internal reinsurance. And for the internal reinsurance, I think it's very healthy to have an internal reinsurance that help us optimize capital utilization and risk and manage our risk -- transfer risk in the entities that can absorb them better. So, I think we're happy with the current arrangements. Yes. I hope that answers your questions.

Operator: Okay, the next question is from Mr. William Hawkins, KBW. Go ahead please.

William Hawkins: Hi, Delfin, thank you very much. You made some helpful comments about Japan Life earlier, thank you. But could I just ask you to go back and either repeat or give it a little bit more detail about the IFRS earnings sensitivity from what's happening in sales? So, would you judge the first half of this year, whether the IFRS earnings were at all distorted by the volatility that you experienced in sales? And then secondly, if we're conservatively to assume that your COLI sales now stay at zero, what would be the fate of your 2020 IFRS earnings relative to 2019? Thank you.

Delfin Rueda: Yes, thank you, Will. I have commented that it's not easy to predict how the sales will there be lowest from now onwards, because for the whole industry, there is new products we are adapting, it depends of how other competitors react. In -- sometimes in the past in previous tax changes, we have seen also some competitors that left the market and we have been systematically in the past maintaining in the top leadership of the top three. So, it is really difficult to predict the dynamics precisely. But to give you a -- of course, the first half of the year has because of the first quarter has resulted in elevated sales, so we do not expect this same level to come in the short-term. But also keep in mind that a significant part of the fees and premium-based revenues are related to the in-force book and the in-force book has been increasing over time and actually in 2018 and the first half of 2019 has also increased, this value -- the in-force business and we were expecting to receive continued regular premiums coming from that part. That's one element. Sales might be down, technical results might be better because of the lower surrenders. Also as sales are lower, there is less impact on the deferred acquisition cost. I cannot give you a more clear guidance on that respect, but yes, the levels of sales and profitability of 2018, for example, as you know are a bit on the high side, but 2020 will be a year on which we are benefiting from the larger in-force book and then we see how that adapt for the years to come.

William Hawkins: So just to confirm then, again, none of us know what's going to happen with sales, but if I assumes that sales were zero, then it sounds like there may be a bit of a phase, but not much because they enforce because moving very slowly.

Delfin Rueda: Yeah, but that will be the wrong assumption, so I mean, we know that COLI sales will not be zero, we have already launched three products, approximately 25% of our value in new business are protection -- are COLI protection products and this has been growing like a 20% over time and therefore we also know that the new products lower surrenders, the need of the SMEs are there, and I don't know the percentage, but certainly I'm very confident to say, at this stage will not be that negative. I know you asked the question in order to have on order of sensitivity about it, but it's difficult to do it this way.

William Hawkins: Okay. That's really helpful. Thank you, Delfin.

Delfin Rueda: Thanks.

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

Robin van den Broek: Yes, good morning, everybody. Thank you for taking my questions. Firstly, I wanted to talk a little bit about the pending Solvency II review, obviously the UFR is a topic there. If you look at year-to-date, beginning of the year, you had a solvency ratio of 230 and I think your UFR benefit roughly represented 65 percentage point in that ratio. If you would do a similar consolation today, I think your actual UFR ratio would probably be below 100%. I'm just wondering, the fact that this issue has grown that much in a short timeframe, do you think that makes it more or less likely for our EIOPA to make this move up the last liquid point, that's the first question. Secondly, what do you think is the key driver for your remittances to stay at these levels? Because if we stay at these rates for a longer and your actual UFR ratio would be below 100, that would imply that you need to remit less then you're generating in the unit otherwise you'll have some issues further down the road. How do you look at that and how does the regulator look at that? Then in connection to this you've always argued that the risk margin is a proper offset for the UFR drag. Can you just explain that a little bit further, because if I look at your risk margin, it's around 5% of your best estimate liabilities, and I think the amortization period is closer to 20 years, while the UFR is a lot more sensitive to rate moves and the amortization I think it's closer to 10 years, as you alluded to in the past. So, it feels to me that the risk margin is only a very small offset for the UFR drag. So, it seems to me that the offset you're talking about in the call is more coming from the higher mortgage spread and the re-risking that you're undertaking, just your view there would help. Yes, I think that was actually it, thank you.

Delfin Rueda: Yes. Thank you, Robin. Maybe why don't you, Jan-Hendrik take the first question and I'll cover the other two.

Jan-Hendrik Erasmus: Hi, Robin. Yes, of course we've taken note of the EIOPA review of 2020 and the review of the Solvency II framework. It has quite a broad scope, there are many elements in the review and we have also in the past said that we think you need to consider all the different elements of the Solvency II framework in conjunction with each other and not in isolation. As to whether current market conditions will influence the thinking of the EIOPA or not, I think that is for EIOPA, so I can certainly not speak for them, but at this stage it's too early for me to say much more on this review.

Delfin Rueda: In terms of the remittances, you've seen the split -- the breakdown of remittances coming from different units and in Life is the largest contributor in terms of dividends, but it's also the unit that with 212% is well-positioned to pay dividends. Also is the unit that every time that we move to a higher yielding assets, increase the capital generation. And you can see that -- you're right, absolutely that in terms of the impact of the UFR drag versus the risk margin release with lower interest rates, these compensation has, I mean, we have always said that the UFR drag is a net -- with the risk margin release is a net negative. As interest rates, you know were higher, we show that drag was closer to the release, but over the last quarter with the reduction, basically this year with the reduction of the interest rate that is lower. What I was referring before, it was yes, a part of the higher yielding assets, the spreads are part of the contribution of the bank, a part of the contribution of asset management, Non-life and so on and so forth that also and that is the case with lower interest rates that release of the risk margin increases and that is another offsetting factor, even if it's not full.

Robin van den Broek: Okay and then Jan-Hendrik, if I could, you are not commenting about the size of these UFR benefits, I guess, you don't want to comment about it specifically or can you give some indication there?

Jan-Hendrik Erasmus: Yeah, I can only repeat a little bit what I've said before, which is that one has to consider all the elements of the framework in conjunction with each other, so not really in isolation, I mean in the end there may also be other changes in the framework, such as the risk margin calculation or the cost of capital. So I think we will just have to wait for the impact of the changes of the package as a whole. And I also can guide you a little bit to the UFR sensitivity that we published again today and we also published at year-end, which gives you a sense of how sensitive we are to changes in the UFR itself.

Robin van den Broek: Okay. Cheers, guys.

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

Andrew Baker: Hi, thank you for taking my questions. Just two please. Can you just give an update on the potential Poland pension reforms? Any potential impact that that will have on your profitability? And then secondly, I know you've done a small longevity reinsurance transaction in the past around your 2017 Capital Markets Day, I believe, is this still something that you look out on a larger scale as you look at ways to optimize the Netherlands Life book? Thank you.

Delfin Rueda: Thanks. I'll answer the first question and Jan-Hendrik will comment on the longevity reinsurance. In relation to the Poland reform, this was announced in April of this year, so not so long ago. And basically, it provides the option to individuals to decide if they want to transfer the funds of their accumulated pension to the so-called private individual pension accounts, i.e., retain it, maintain it with ourselves. And if that is to happen then there has to -- they have to pay a 15% one-time charge -- tax charge in order to allow future withdrawals to be tax free. So in case our clients decide to stay with us, our expectation would be that assets under management would reduce by this 15%, because the tax will be paid from the current funds. The other alternative for them would be that they transfer their savings, their pension savings to the public administrator, the public individual pension accounts administration by the state, in that case, they don't need that incur any tax upfront, but when they receive their pensions, the taxes will be paid. It's relatively early on to analyze or consider what's the percentage of individuals, what they will do. And as a consequence to provide too much clarity about the impact. These negatives comes with some positives, in the sense that that allows actually to have a individual proper third pillar pension system on which we are very well positioned in order to maintain these private pensions going forward. But in the short term, it will have a negative impact in the profitability, which is difficult to account at this point of time. Maybe you can answer on the longevity.

Jan-Hendrik Erasmus: Yes, thank you, Delfin. Hi, Andrew. Longevity risk is from our DB pension and group pension business in the Netherlands. It's one of our largest risks and we actively manage it by shifting to products with lower guarantees, by re-pricing at renewal that's using the latest mortality tables and of course then shifting to DC products where you have a far lower exposure to the longevity. On top of that, we are actively looking into, for example, reinsurance to manage this risk provided that we can enter into such a transaction at the right price. So of course, we consider the risk return, but this is something we are still looking at and we do have people allocated to this in the company.

Andrew Baker: Great, thank you.

Operator: The next question is from Mr. Ebrahim Saeed, Deutsche Bank. Go ahead please.

Ebrahim Saeed: Hi, there. Just one quick please. Could you give us an update as to the timing of the VIVAT transaction, when that might closes and some sort of sensitivity as to how soon it might be or if it gets delayed, how late it could get? Thank you.

Delfin Rueda: Thank you, Ebrahim. We believe we are working towards closing in the first quarter of next year.

Ebrahim Saeed: Is that real -- as realistically the earliest you see it or is there a possibility that might happen before that?

Delfin Rueda: I think it's the timing that which we are aiming for, also even from a financial accounting point of view, I prefer to do it, in close periods, not just the middle of December or whatever. So the objective is basically to be down at the first quarter and in any event, it's now not so much subject only to us, it is pending the normal regulatory approvals and that is basically the expected timing on first quarter 2020.

Ebrahim Saeed: Okay, thank you.

Operator: Ladies and gentlemen, we have come to the end of the Q&A session, I would like to hand back to conference to Mr. Delfin Rueda. Go ahead please, Sir.

Delfin Rueda: Thank you very much. Let me just wrap up by saying that we have today reported good set of results, a strong commercial momentum and a solid capital position. Thank you for joining the call. And I wish you all a pleasant day.