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Edited Transcript of NN.AS earnings conference call or presentation 14-Feb-19 9:30am GMT

Q4 2018 NN Group NV Earnings Call

Feb 18, 2019 (Thomson StreetEvents) -- Edited Transcript of NN Group NV earnings conference call or presentation Thursday, February 14, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Delfin Rueda Arroyo

NN Group N.V. - Vice Chairman of Executive Board & CFO

* E. Friese

NN Group N.V. - Chairman of Executive Board & CEO

* Jan-Hendrik Erasmus

NN Group N.V. - Chief Risk Officer & Member of Management Board

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Conference Call Participants

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* Albert Ploegh

ING Groep N.V., Research Division - Research Analyst

* Ashik Musaddi

JP Morgan Chase & Co, Research Division - Executive Director and Co-Head of European Insurance Equity Research

* Bart Jooris

Banque Degroof Petercam S.A., Research Division - Analyst

* Cor Kluis

ABN AMRO Bank N.V., Research Division - Analyst

* Farooq Hanif

Crédit Suisse AG, Research Division - Head of Insurance Research in Europe

* Johnny Vo

Goldman Sachs Group Inc., Research Division - MD

* Matthias De Wit

Kempen & Co. N.V., Research Division - Analyst

* Robin van den Broek

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, Mr. Friese. Over to you.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [2]

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Good morning, everyone, and welcome to our conference call to discuss NN Group's results for the fourth quarter of 2018. I will start today's presentation by talking about the highlights of the fourth quarter results. I will then take you -- take this opportunity to look back on 2018, in particular, at the progress we've made to integrate Delta Lloyd as well as the financial and commercial developments in the past year. Delfin Rueda, our Chief Financial Officer, will then take you through 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 the call for Q&A. And Jan-Hendrik Erasmus, our Chief Risk Officer, is also with us today to answer your questions.

So let me start with the highlights shown on Slide #3. NN Group's operating result of the ongoing business for the fourth quarter of 2018 was EUR 343 million, broadly stable on the same quarter of 2017. We saw improved results at the main insurance businesses, offset by lower results at the segment Other and Asset Management. We continue to increase efficiency across the organization, reducing the expense base of the business units in scope of the integration by a further EUR 20 million in the fourth quarter, bringing the total cost reductions to EUR 289 million compared with the full year 2016 expense base.

The integration of Delta Lloyd is progressing well with the legal mergers of the Life and Non-life entities now executed as announced in December. This triggered the elimination of the goodwill allocated to Delta Lloyd Life, which is the primary reason for the net loss for the fourth quarter of EUR 533 million.

Our commercial performance was again strong with total new sales in the fourth quarter of EUR 407 million, up by 8% at constant currencies on the same period in 2017.

Value of new business, which we report twice a year, was up 13% when comparing 2018 to 2017. And I will talk more about the commercial performance on a later slide. We're announcing today a proposed final dividend for 2018 of EUR 1.24 per share, bringing the 2018 full year dividend to EUR 1.90 per share.

This represents an increase of more than 14% on the 2017 full year dividend per share. The NN Group Solvency II ratio at the end of fourth quarter of 230% already reflects the full deduction of this proposed final dividend.

And finally, I am pleased to announce today the share buyback program for an amount of EUR 500 million to be executed over a period of 12 months.

So let's move to Slide #4. As I already mentioned, the integration of Delta Lloyd into NN Group is progressing well and we achieved several important milestones in the past year. In December, we received approval from the Dutch regulator to expand our Partial Internal Model to include the Dutch Delta Lloyd entities, creating a uniform risk and capital management framework across our largest insurance entities in the Netherlands. As we reported, this resulted in a 9 percentage point uplift to the Group's Solvency II ratio.

The legal mergers of the various Delta Lloyd and NN entities have now all been executed. The operational integration of the head office and the Asset Management businesses are completed. And we continue to integrate teams, systems and processes at the other business units. We will remove duplicate NN and Delta Lloyd's IT platforms by decommissioning applications once migrations are completed, which will support our aim to further increase efficiency.

Perhaps, more importantly, we now offer most of our products and services under the Nationale-Nederlanden brand, truly becoming one company for our customers and advisers.

So let's now turn to Slide #5. Throughout the integration process, we have never lost sight of our customers with the objective of helping them secure their financial future. We need to provide products and services that meet our customers' needs. For example, our international insurance businesses launched various new products, including the new protection products in Spain, offering various modular options tailored to a customer's profile and that of his or her family as well as a health app, giving customers 24/7 access to medical specialists.

In Japan, we launched the successful new COLI product in November, providing coverage to business owners in the event of unforeseen accidents, the need for nursing care or disability. We're seeing growing demand for products that contribute to a more sustainable future. Our asset manager has embedded ESG criteria across the whole investment process and offers responsible investment funds, such as the recently launched European Sustainable Infrastructure Debt Fund.

In 2018, we saw lower sales in the Netherlands due to a lower volume of Group pension contracts that were up for renewal. On the other hand, sales of higher-margin businesses in Europe and Japan were up. So despite an overall decrease in total new sales, the value of new business for 2018 was up 13% on 2017.

I will now move on to Slide #6. On this slide, I would like to briefly recap on our performance in 2018 in terms of the medium-term financial targets that we have set for the group as a whole. To start with, we have achieved total expense savings to date of EUR 289 million compared with 2016 full year administrative expense base. So we are well on our way to reach our target expense reduction of EUR 400 million by the end of 2020.

The operating result for 2018 grew 3% versus 2017 compared with a target of 5% to 7% annual earnings growth an average for the medium term. Adjusting for nonrecurring items in both years, the growth was 7%. Delfin will talk more about the development of the operating units and operating results on a later slide.

Let me just remind you that this is a medium target, and we expect growth in some years to be higher than in others. Finally, we aim overtime to generate free cash available to shareholders in a range around the net operating result. In 2018, the free cash flow of EUR 1.2 billion was broadly in line with the net operating result for the year, whereas the free cash flow in 2017, was impacted by capital flows related to the Delta Lloyd acquisition as well as a deduction for the provision related to ING Australia Holdings. Delfin will go into the details of our free cash flow later in the presentation.

So let's now turn to Slide #7. We have today announced that we are proposing a 2018 final dividend of EUR 1.24 per share. This brings a total 2018 dividend to EUR 1.90, an increase of more than 14% on the 2017 dividend per share. This is in line with our guidance of a double-digit increase in a dividend per share, as 2018 is the first full year of incremental cash flows from the Delta Lloyd acquisition.

The 2018 dividend represents a payout ratio of 50% of the 2018 net operating result of the ongoing business. The proposed dividend will be voted on at the Annual General Meeting of Shareholders on the 29th of May. We remain committed to our dividend policy in which we aim for a sustainable ordinary dividend per share. This also means that unless we can deploy excess capital in value-creating opportunities that we will look to return that capital to shareholders in the most efficient way.

The acquisition of Aegon's life insurance business in the Czech Republic and its life insurance and pension businesses in Slovakia in 2018 is an example of a value-creating investment that we believe will strengthen our position and distribution cap that are used in these markets.

In view of our robust capital position, we have announced that we will execute an open market share buyback program for a total amount of EUR 500 million. We intend to cancel all of the shares acquired under this program. This share buyback program demonstrates our disciplined capital management as well as our commitment to returning excess capital to shareholders. At the same time, we believe it is essential to maintain a strong balance sheet and the financial flexibility to be able to pursue value-creating corporate opportunities going forward.

I will now hand over to you, Delfin.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [3]

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Thank you, Lard, and good morning, everyone. Let me start with NN Group's operating result of the ongoing business for the fourth quarter of 2018. This was broadly stable at EUR 343 million compared with the fourth quarter of 2017. The current quarter reflects a higher technical margin at Netherlands Life, higher results at the Insurance Europe and Japan Life as well as the spend savings across the organization.

Our Non-life business reported an improved combined ratio in both Disability & Accident and Property & Casualty. The total combined ratio for the fourth quarter was 96.4%, reflecting the various measures that we are taking to improve performance at this unit as well as generally favorable quarter in terms of claims experience.

On the other hand, we saw lower results at the holding, mainly due to a nonrecurring charge and revise method for charging head office expenses to the segments.

Lower results were also reported by their Insurance and Banking business and Asset Management. Please note that our Asset Management business benefited from EUR 10 million of nonrecurring items in the fourth quarter of 2017. Taken as a whole, the Group's operating result for the current quarter includes negative nonrecurring items of EUR 10 million, while the fourth quarter of 2017 including EUR 14 million of nonrecurring benefits. Excluding these items, the operating result for the fourth quarter of 2018 is 7% higher than the same period in 2017.

The negative net result of EUR 533 million reflects the EUR 852 million impairment of goodwill, that Lard mentioned earlier as well as lower nonoperating items and a higher tax charge. Let me remind you that this impairment is a noncash item that does not have an economic cash or Solvency II impact.

Moving now to the next slide, which shows our full year 2018 results. The full year 2018 operating result of the ongoing business increased 3% compared with 2017 to EUR 1 billion, EUR 626 million. The operating result in 2017 benefited from a total of EUR 104 million of private equity and special dividends as well as nonrecurring items, while the operating result in 2018 benefited from EUR 38 million of such items. Excluding these items, the operating result increased 7% on 2017.

This increase reflects improved results of Netherlands Life, Netherlands Non-life and Insurance Europe and expense reductions as well as the inclusion of Delta Lloyd from the second quarter of 2017, partly offset by a lower operating result at Japan Life.

The full year 2018 net result reflects the elimination of goodwill as well as higher special items relating to restructuring expenses and other projects. The nonoperating items mainly relate to capital gains on the sale of debt and equity securities as well as the revaluation of real estate.

Before we move on to the next slide, let me mention that we will be changing our segment reporting as from the first quarter of 2019 to include the banking business as a separate segment and moving Japan Closed Block VA into the segment Other as well as some smaller reclassifications. The impact of these changes will we reported in a pro forma financial supplement based on the new segmentation that we will publish on our website tomorrow.

On Slide 11, I will talk about the expense savings. As Lard mentioned, we aim to review the administrative expense base for all the business units in the scope of integration by EUR 400 million by the end of 2020. Compared with the full year 2016 expense base, we have already realized a total cost reduction of EUR 289 million, representing around 72% of the total targeted cost savings. While we continue to make good progress, please bear in mind that the more complex parts of the operational integration are still ahead of us. This means that the expense reductions will not be linear and that some units may have times see expense increases to support growth and make necessary investments.

On the next slide, I will like to talk about our cash capital position. The holding company cash capital increased to just above -- just over EUR 2 billion at the end of the fourth quarter of 2018 from EUR 1.9 billion at the end of third quarter. The free cash flow during the fourth quarter was EUR 329 million, driven by EUR 463 million of dividends from subsidiaries. This was partially offset by capital flows, comprising own shares, departures for an amount of EUR 147 million as well as the amount paid to terminate the warrant agreement with ING Group of EUR 26 million.

Total free cash flow for 2018 was over EUR 1.2 billion.

Total dividends received from subsidiaries amounted to almost EUR 1.6 billion. This was partially offset by EUR 298 million for holding company expenses, interest on loans on debt and other holding company cash flows, and EUR 78 million of capital injections. Total capital flows to shareholders in 2018 amounted to EUR 645 million. Details of the dividends upstream by segment this quarter can be found, as usual, in the appendix of this presentation.

On Slide 13 and 14, I will take you through the developments in NN Group's Solvency II ratio. NN Group's Solvency ratio was 230% at the end of the fourth quarter, down from 239% at the end of the previous quarter. This ratio reflects the deduction of the proposed 2018 final dividend of EUR 415 million that we announced today, and which will be paid in June as well as the termination of the warrant agreement. Excluding these items, the Solvency ratio was 237% at year-end 2018.

The operating capital generation for the fourth quarter added 6 percentage points to the ratio. On the other hand, market variance lowered the ratio by 7 percentage points, mainly as a result of negative equity revaluations. The category Other reflects the expansion of Partial Internal Model, which positively impacting the ratio through a lower SCR. This was more than offset by the impact of the reduction of the corporate tax rate in the Netherlands, which negatively impacted the ratio through a lower DTA in Own Funds and higher SCR. Economically, of course, the lower corporate tax rates will be positive, resulting in higher capital generation and profits over time.

Let's turn to the next slide for the full year movement. The Solvency II ratio was 199% at the start of 2018 and increased to 230% at the end of the year.

The total operating capital generation in 2018 was EUR 1.4 billion, of which around EUR 1.2 billion was the growth of Own Funds and around EUR 300 million, the decrease of Solvency Capital Requirement. These added 23 percentage points to the ratio.

Market variances had a positive contribution to the ratio of 20 percentage points, mainly reflecting the favorable impact from movements in credit spreads as well as positive real estate revaluation. This was partially offset by equity movements and movements in interest rates.

Capital flows represents the 2018 interim and final dividends as well as the impact of the termination of the warrant agreement with ING last November.

Finally, as you know, the legal merger of Delta Lloyd Life into NN Life was executed as at the 1st of January this year and so will report just 1 ratio for NN Life as from the first quarter of 2019. To give you an idea of the combined ratio of these 2 entities at the end of 2018, the simple sum Solvency ratio of NN Life and Delta Lloyd Life after the legal merger on 1st January, 2019, is estimated at 231%.

And with that, I will pass you back to Lard for wrap up.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [4]

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Thank you, Delfin. Looking back on 2018. NN Group has delivered a solid financial performance posting healthy operating results and further increasing efficiency throughout the organization. We achieved a number of important milestones in the integration of Delta Lloyd with the approval of the expanded Partial Internal Model, the completion of all the legal mergers and the rebranding of products and services to Nationale-Nederlanden.

One of our priorities is to maintain a strong capital position and this has enabled us to propose a final dividend for 2018 of EUR 1.24, and to deliver on our aim for a double-digit increase of the 2018 dividend per share. We've also announced a EUR 500 million share buyback program to be executed over a period of 12 months, showing our commitment to our dividend policy of returning excess capital to shareholders, unless it can be used for value-creating corporate opportunities.

Going forward, we will continue to focus on executing our strategy of successfully integrating Delta Lloyd, further improving performance, accelerating the transformation of the business model and continuing to allocate capital rationally.

I will now open the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from Mr. Ashik Musaddi, JPMorgan.

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Ashik Musaddi, JP Morgan Chase & Co, Research Division - Executive Director and Co-Head of European Insurance Equity Research [2]

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I have a few questions. I mean, first of all, thanks a lot for the dividend and the buyback. I think it's all going as the plan but well done. Just on dividend outlook now basically. Now if I think about your dividend, you've increased the dividend by 15%, you have done the buyback, which is around 4%. So it looks like the natural progression for DPS growth is at least 4% for 2019. So what would you say on that, I mean, do you plan to maintain a flat dividend cost or any thoughts on dividend that would be great? Secondly, if I look at the capital generation, the organic capital generation before holding company cost, 2018 was very strong at around 23 percentage points, which is Slide #14. Any thoughts on what the normal level should be? Or is this you reckon a more normal level? And third one is in terms of remittance, the Dutch Life remittance, can you give us some guidance on that? Because now it's a legal entity and you still have a strong Solvency of around 230% in Dutch Life. So any thoughts on what the remittance -- annual remittance from Dutch Life should be?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [3]

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Thanks, Ashik, for your questions. I will hand over to Delfin for the answers.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [4]

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Yes, thank you, Ashik, for your questions. The dividend increase in 2018 was already announced to be double digit because of incorporating for the full year the benefits of the integration of Delta Lloyd. It will be a little bit too much of a boost to assume a continued growth for double digit going forward. So our capital generation and the free cash flow generation is more or less in line and the medium term is expected to be similar to the net operating result. And we gave the guidance over time somewhere between 5% and 7%. But obviously, the objective is to continue with stable growth of the dividend. And any decision on the dividend will be taken according to the circumstances at that time. Capital generation, indeed, I concur with your assessment that it was a strong at 23%. And the question about how to normalize it, is always a difficult one. Because as you know the operating return and the Solvency II is influenced by several aspects, the business performance, the financial markets, the assumptions. Additionally, changes in tax rates, the UFR as well as the level of interest rate impact the operating capital generation. I think, however, if you take a step back and you look for the full year 2018, this 23%, which excluding the impact of storm was 24%. You can also look at the last 6 quarters since the acquisition of Delta Lloyd. And then it was 35 points increase over these 6 quarters with a relatively stable over that period. And even when I look you know from the start of Solvency II, since January 2016, capital generation there was 57 points or 52 points, excluding the cost of requalifying subordinated debt. The point I'm trying to say is that although you cannot predict, already we have quite few quarters on which you can see that, more or less, there has been certain stability on this. So going forward I think is -- again, the volatility will maintain. And maybe just a few comments: one, about the Japan Closed Block VA runoff that you know that after we still expect a small release in 2019, but not material contribution later. Also, of course, our efforts to improve and grow our business is supposed to lead to improvement in the free cash flow generation. Elements like the decrease of the UFR also increases the operating capital generation going forward. But this is just an example of the different elements that are changing every quarter. In terms of remittances from Dutch Life, there was an increase in the dividend coming from the Dutch Life business from the normal EUR 150 million to EUR 175 million to reflect the increased capacity capital generation coming from the segment. And as you've seen, we have maintained a stable dividend of EUR 1.75 per quarter. I think that the best guidance is that we will maintain stable dividends from the unit also, based on the strong capital solvency.

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Ashik Musaddi, JP Morgan Chase & Co, Research Division - Executive Director and Co-Head of European Insurance Equity Research [5]

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Yes, but if I look at Dutch Life dividend for 2018, it was EUR 837 million. So what's the difference between EUR 175 million x 4 which is EUR 700 million and EUR 837 million?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [6]

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Yes, in 2018, there was some dividends coming also from ABN AMRO. And that it was not -- you cannot just assume as being recurrent amount going forward. We will, of course, expect some dividends coming from also ABN AMRO Life joint venture, but not to the same level.

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Operator [7]

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The next question is from Mr. Matthias De Wit, Kempen.

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Matthias De Wit, Kempen & Co. N.V., Research Division - Analyst [8]

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Two questions we well, please. First of all, on M&A you mentioned in the press release that you want to maintain financial flexibility for opportunities. Can you confirm whether or not these include (inaudible), please? And just linked to that, if you were to finance large acquisitions or any acquisitions, could you use the excess capital to team the Netherlands for those, either through special dividend or through acquiring directly from the level of NN Life? And then just a second question on Asset Management. We have seen a quite strong decline in fee margins during the quarter to I think an all-time low now. Is that expected to continue the pressure you see on fee margins? Or are we approaching a level you consider sustainable?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [9]

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Yes, Matthias, I'll take both questions. So first on M&A. As -- I will not comment on particular names. What I can say is that, in general, we are always open to opportunities if they present themselves, especially with the priority of markets where we already have a presence, and M&A is a matter of opportunity and discipline. And both are very important to ensure that we take that into account. We do want to have financial flexibly for that obviously, if these opportunities are there and that we'll assess them at their own merits. When it comes to NNIP, the margins, what you see happening over the last year at the asset manager is a couple of things. First of all, the asset managers have done an outstanding job in integrating Delta Lloyd asset management quickly. That's been done, and they've concluded that in a good manner. Secondly, you can see that a lot of expense reductions have taken place as well where the asset manager has been confronted like the entire industry with fee pressures, and they have been able to withstand that by making sure the platform as a whole is more efficient. The second thing -- the third thing I would like to mention is that also the cost that need to be absorbed as a result of the MiFIDs, as a research cost as a result of MiFID regulation has also been absorbed. So please take that into account. If you look at the entire context of the industry, it's been a difficult year for the entire industry. What I find actually quite encouraging is in the fourth quarter, we saw that third-party net flows were flat. So the outflows that we saw earlier in the year with a combination of risk off or other investment -- investor considerations, but also combined with -- some investor considerations about concentration of mandates when moving -- when integrating Delta Lloyd and NNIP, we see that in the fourth quarter third-party was stable. And that's good. We've launched a new plan, as you know, for the coming years, where we focus on building our commercial momentum and specific strategies, and we're going to continue to do that. We also need to note, Matthias, that in Q4 '17 we had, of course, a EUR 10 million number that was the performance fees related to Delta Lloyd funds that we flagged that at that point in time as a one-off, which you, in the comparable quarter don't see back, for the last quarter of 2018 as these funds have been integrated. The margins for the future, as we know, in the industry will remain under pressure. So the focus on efficiency is going to be -- is going to continue.

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Matthias De Wit, Kempen & Co. N.V., Research Division - Analyst [10]

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Okay. And maybe just on the possible financing of acquisitions through NN Life or by using the excess. Is that something you consider realistic? Or not at all?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [11]

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We maintain, in general, our flexibility for opportunities if they present themselves, and if they adhere to the strict financial and nonfinancial criteria that we have.

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Operator [12]

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The next question is from Mr. Cor Kluis, ABN AMRO.

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Cor Kluis, ABN AMRO Bank N.V., Research Division - Analyst [13]

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Cor Kluis, ABN AMRO. A couple of questions. First of all on the Solvency II ratio developments from the beginning of this year, given the fact that interest rates have been coming down somewhat and corporate credit spreads, of course, have come in somewhat. So obviously agree with that this market effect would have some negative effect on the Solvency ratio. Could you give an indication how large that market effect has been year-to-date? And my second question is on the dividend from the bank. I think if I read it correctly that in 2018, you only upstreamed in Q2 EUR 8 million from the bank, the bank makes almost EUR 100 million profit, good solvency ratio and the mortgage book is not really growing at 2%. So why not upstreaming more capital from the bank? And if you have not yet done that, may be put in the little bit on what you think about upstreaming of capital from the bank in 2019? And my last question is somewhat M&A related whatever case might come on the table. If the case will be little bit larger, would there be a chance that you put a pause of the EUR 500 million share buyback? Or do you feel comfortable with the cases that you have on the table that the EUR 500 million can be fully executed, as you've mentioned today? Those are my questions.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [14]

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Yes, thanks, Cor. Let me take the third question, then Jan-Hendrik, can you do the first, and then Delfin, the second question. So first on the acquisitions. Well, we've said in the press release that we maintain financial flexibility to do acquisitions if an opportunity arises. And we have -- we also maintain the flexibility to stop or pause a buyback, if we would go for very large M&A. But that's all speculative. So let's say, yes, I don't have much to add to that, to be honest. So Jan-Hendrik, over to you.

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Jan-Hendrik Erasmus, NN Group N.V. - Chief Risk Officer & Member of Management Board [15]

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Thank you, Lard. Cor, there are some things that we'll see in the Q1 ratio that we already know. The first is the reduction of the UFR to 3.9%, which will have a 4% negative impact on the ratio, in line with our sensitivities. There's also the buyback, which will come out of the ratio in 1Q '19, which you can work out the impact is going to be around 7 points. Then EIOPA published an update of the VOLA reference portfolio as well, which will also be a small negative and on top of that, we saw, you are right, the markets we saw equities increasing, corporate bond spreads tightening, and we've also seen reduction in rates and also a bit of steepening, all of which, if you look at our sensitives will be negative, as I think you would expect.

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Cor Kluis, ABN AMRO Bank N.V., Research Division - Analyst [16]

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Is it somewhat indication on the market effect, the negative size, percentage-wise?

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Jan-Hendrik Erasmus, NN Group N.V. - Chief Risk Officer & Member of Management Board [17]

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Yes, it's a little bit too early to say. But I think if you look at the sensitivities, those are the best guidance I would give on that. So far they're moving very much in line with the sensitivities.

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Cor Kluis, ABN AMRO Bank N.V., Research Division - Analyst [18]

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And sorry, the dividend on the bank?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [19]

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Yes, the dividend on the bank? So Delfin, please.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [20]

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Yes, Cor. The dividend of the bank indeed, let's not forget that the bank is only, if I'm correct, only 8 years old. So it was founded in 2018 -- 2011 and basically has gone first into breakeven, then increasing the profitability quite well. Then EUR 8 million of dividends in the second quarter of 2018. Going forward we do indeed, expect some dividends coming from the bank. And depending on their growth and other characteristics, I think, what I would say is to expect some modest dividends coming from the bank going forward including 2019.

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Operator [21]

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The next question is from Mr. Johnny Vo, Goldman Sachs.

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Johnny Vo, Goldman Sachs Group Inc., Research Division - MD [22]

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Just the first question. Now that the legal merger has been done, can you give us an update of the guidance of the cash buffer you want to keep as a holding company. I think, previous guidance was EUR 0.5 million to EUR 1.5 million. So where is that number today? And the second question is, just in terms of like the gross debt and leverage ratio. I mean, if I pro forma the leverage ratio for the final dividend plus the buyback than you're you not too dissimilar from where you were in 2017 post the Delta Lloyd deal, a little bit better off, but not that drastically. So is there a plan to reduce gross debt or will deleveraging come through growth in shareholders' equity?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [23]

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Yes, thanks, Johnny. Delfin, can you take both questions actually?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [24]

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Yes. I think the -- Johnny. The first question on the guidance on the cash buffer stays the same, between EUR 0.5 million and EUR 1.5 million. When we introduced the guidance, we did it in such a manner in order -- is relatively a wide range. But we did it with eyes wide open with the idea that this should be suitable for the different circumstances depending on the level of solvency of the subsidiaries. So basically, the guidance is unchanged. In terms of the question on the amount of debt, I think, that is very important to just take into account not only, not to focus too much into leverage ratio because as you said, the time that we did acquisition of Delta Lloyd, we originally increased our leverage by EUR 2.5 billion. And -- but however, the fixed charge ratio increased from 2016 to 2017 from 12.8x to 13.5x. So I think it's always very important to take into consideration the capacity to cover your interest. And just to give you an indication, currently, our total debt is basically -- has a cost of weighted average of 2.2% after-tax. So I think that this is quite low, certainly in comparison to the cost of capital. Our financial leverage as has been indicated by many different factors is strong, which actually doesn't come as a -- and the conclusion for that is that we should not reduce the amount of leverage because the financial leverage -- the financial capability is there, and the cost of debt is relatively moderate. Also, keep in mind, is that since the acquisition of Delta Lloyd we reduced already by close to EUR 1 billion immediately following the acquisition. And next year, we have EUR 300 million that will be -- -- will mature -- senior debt, as you know, in June. So gradually, that will increase.

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Johnny Vo, Goldman Sachs Group Inc., Research Division - MD [25]

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So you're targeting another EUR 300 million debt reduction?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [26]

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EUR 300 million is the senior debt in June next year that mature. And currently, our plan is not to refinance that. So that will result in a reduction of leverage by EUR 300 million.

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Operator [27]

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The next question is from Mr. Robin van den Broek, Mediobanca.

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Robin van den Broek, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [28]

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I would like to come back on the capital generation. Delfin, you mentioned that 23 percentage points, is that you could see as a sustainable rate. But I was just wondering about the moving parts. Because you mentioned Japan Closed Block VA contribution will drop. So the EUR 0.3 billion reduction of SCR is more likely to go down, to I don't know, a EUR 100 million maybe a year on the back of the individual Life drop in the Netherlands. But that does include multiplying effect to get to the 23 percentage points capital built. So it seems to me that that 23 percentage points should actually come down. And I appreciate that the corporate tax and UFR will probably increase your Own Fund generation, maybe from EUR 1.2 billion to EUR 1.3 billion a year. But still if I look at the map, I would say that the 23 percentage point is a bit on the high side going forward. So your commentary there would we appreciated. Then on the Dutch remittances from Life, I guess, the consistency in getting a similar number out every quarter is something that makes it very easily manageable from a regulatory point of view. But I think you did mention before that your -- the cash taken out from Life should be higher than the net operating results. But EUR 700 million seems to be basically in line. So when is the natural point for you to step that rate up now so now that the legal merger's there? Is that something you're thinking about shorter term? Or are you sticking with EUR 175 million for now? I was also thinking about the Japan business dividends, last year you excluded that. This year, it should come back. Any feasibility on what kind of number we can expect? And lastly, on the combined operating ratio, I think, a very good progress this year, Q4 even below the 97%, that was targeted. I was just wondering how sustainable do you think that is? How many efforts do you still have on the plan to come through? And what kind of further expectation can we expect on the back of that?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [29]

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Thanks, Robin. Quite a number of questions. I will take the last one, and then I'll ask Delfin to take the other questions. So on the Non-life company, yes, the combined ratio that we printed this morning for the total Non-life company is 96.4%. What I find encouraging is that we now see, of course the storm that we had in January is part and parcel of our business, don't get me wrong, but if you want to look at the -- to what extent the measures that you are taking, are taking effect you kind of need to look at the underlying without the storm. And then I'm seeing 5 quarters in a row where our combined ratio is improving. And that is encouraging as we aim to implement the measures -- the range of measures that we announced at the Capital Markets Day at the end of 2017. It's a combination of many measures, as you know, underwriting, price increases where necessary and also expense reductions, and we've reduced as you know, for this year, 2018, about 18% of expense reductions where we target to reduce expenses in the Non-life company with 20% to 25% of the full year '16 cost base of 480 -- EUR 481 million by the end of 2020. So there's still room to go on the expense savings side, that's one thing. And secondly, we aim, of course, to improve -- continue to improve to the underwriting results. So bottom line, pleased with the progress that we're making, quite a number of quarters in a row, more to come. The key thing here is that our target is 97% or below, and the important thing I always say is we need to make sure it's something that is sustainable. It's a real capability that we need to build to ensure that we have a structural improvement of the Non-life results. I can dig deeper if you want, but for now I would like to...

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Robin van den Broek, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [30]

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Maybe just a short follow-up. So basically, we should look at this from 97% is in a bad year? And -- but if it's a normal year, should actually be...

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [31]

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We look at this 97% or below as our target. We aim to structurally improve the profitability of this business. We are taking a lot of measures to do that. Also making sure we're building capabilities around pricing, analytics and stuff like that. So this is a program that we have announced a while back, and we will continue to drive home. Then on the other questions, Delfin, can I -- can you be so kind as to take us one by one?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [32]

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Yes, thank you very much, Robin. So in terms of the 23% capital generation, if it is sustainable, you are right indicating that the Japan Closed Block VA, we have indicated that several times. We still have some runoff helping both the SCR and some release of the surplus capital coming through 2019. And then you know that will decrease significantly. But also keep in mind that the insurance business will continue contributing some contribution to the capital generation. But there are also quite a few other things that still remain positive. The runoff of the Life, individual Life business continues. We have seen over the last quarters, and we expect that to continue, positive impact in improving the excess return due to the gradual shift towards higher-yielding assets. The UFR has decreased and as a consequence, although, the Own Funds has been decreased due to that, the UFR drag is lower and the operating return will continue. But also -- and I think, even more important is that we're not staying still, and we are improving the performance of the group. And that is coming not only through the Non-life business but also we have as you have seen in the evolution of the value of new business very positive evolution both in Europe and Japan. So all those elements need to be taken into account. We have; however, as a policy, we don't try to give forward-looking expectations of how this is going to evolve. We tend to be cautious because of the volatility that entails. But I think I've mentioned a few more positives than negatives.

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Robin van den Broek, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [33]

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That's very clear, Delfin. Maybe one follow-up. Because the SCR drop will reduce, right? So when you look at 23 percentage point contribution for this whole situation, there is basically a multiplier effect on that because it's the denominator, not the numerator. And I think your positives are more on the numerator side than on the denominator side. So I think it's very supportive of what you say. But I'm just wondering if these positives on the numerator side are enough to offset that?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [34]

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Yes, I think they are more than enough to compensate that. I think this multiplier with SCR has been a bit exaggerated. So I think the evolution of the Own Funds are very important even if the SCR were to decrease. Also keep in mind, that when the SCR grows, it's also because we are writing new business that even in the same quarter or later on will continue to contribute with additional Own Funds generation. Maybe moving to your second question on the remittances. Maybe I will point at you the pro forma combined solvency ratio at the end of the year for the Netherlands, for NN Life of 231%. So that I believe gave some room in order to maintain some stability within the dividend. But as I said -- as I said before we will just look at the amount of dividend, according to the circumstances as they come. Japan Life, you are right, I can confirm that in 2018 this was a special year for Japan Life because of particular Japan GAAP adjustment that was required to do on the reserving. But otherwise, we do expect it to come and distribute dividends. In terms of the amount, you know as for the other units we prefer not to be as specific.

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Operator [35]

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The next question is from Mr. Farooq Hanif, Crédit Suisse.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [36]

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Just going back to Johnny's earlier question on Holdco cash. I get that you don't want to change the target. But when you do a 1 in 20-year stress test now, do you find the number is lower or higher than where you were at 2017 pre the merger? And the second question is, again, I guess, on economic capital. With spread widening and the introduction of Delta Lloyd into the Partial Internal Model, presumably your dynamic VA impact informs you, it will be much larger than it was disclosed last year. And then I was wondering if you could give us some -- a picture of how much that is? And whether I am right?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [37]

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Yes, Farooq. So, gentleman, you take the first one, Delfin, and then Jan-Hendrik, can you take the second one. So Delfin, please, over to you.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [38]

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Sorry, the microphone was not on. On the whole company cash. We indicated, of course, that after a 1 in 20. Once we merge the legal entities we would have some benefit of being on the lower range. But please keep in mind that, because of the very positive evolution on the solvency of Delta Lloyd at that time, that benefit was already obtained. So there is not a big change from the level at the end of 2017.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [39]

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So Jan-Hendrik, for the second question.

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Jan-Hendrik Erasmus, NN Group N.V. - Chief Risk Officer & Member of Management Board [40]

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Farooq, the first thing to say about the dynamic VA is that it of course, doesn't affect the Own Funds at all. In that case, we just use the EIOPA-disclosed VOLA, and so we're really talking about the SCR here. And you're right, when we expanded the scope of the internal model, of course we also expand the scope of that mechanism. So you will see an increase roughly proportional to the size of the business that is now included within the scope there.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [41]

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You are able to -- sorry, you're probably not going to answer this, but what is that percentage increase roughly?

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Jan-Hendrik Erasmus, NN Group N.V. - Chief Risk Officer & Member of Management Board [42]

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You can just look at the relative size of the liability and asset books, and I think that estimate will be as good as any I could give you now. I mean the whole point here is that is of course part of our approved internal model with DNB. And what you see is that the dynamic VOLA is in fact, an offset of what the VOLA would be in stress scenario. So it is a -- it's all part of an integrated model, and I really think the key point is that, there is no change here. This is a model that we had before. It's a slight expansion of it. And also the Own Funds are untouched by this mechanism.

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Operator [43]

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(Operator Instructions) And the next question is from Mr. Albert Ploegh, ING Bank.

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Albert Ploegh, ING Groep N.V., Research Division - Research Analyst [44]

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Few questions left. One is that, one of the other Dutch peers this morning announced the charge related to some updated mortality lapse assumptions in the Dutch business. So can you maybe comment on how you look at that and whether you already refute your own assumptions also with Q4? And the second question, coming back a bit to the Non-life business, with indeed very encouraging trends. So looking at 2019 in terms of the gross written premiums. What is your best estimate currently in terms of growth because I guess you're still pruning also some portfolios, putting forward price increases, or well did -- net be some low single-digit growth possible or is that still too early given where you are in the whole optimization of that business line?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [45]

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Yes, let me take that Non-life piece, and then Jan-Hendrik, can you do the mortality discussion. So on Non-life, what we have seen actually in gross written premium for 2018 as a whole, we actually saw it sort of moving slightly up and that is the combination obviously, of many things, right? So yes, we do call product lines where we believe that through the cycle -- we are not the right -- we shouldn't offer that any longer. The -- we -- there are price increases and rate increases, which of course create higher gross written premium. At the same time, it also depends on the lapses that you have on the contracts that leave your book. So far that has been a good and flattish type of trend overall. So for 2019, we do not expect much difference in the approach that we're taking there. We're just continuing with the approach that we have seen so far. Then over to you, Jan-Hendrik for the mortality.

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Jan-Hendrik Erasmus, NN Group N.V. - Chief Risk Officer & Member of Management Board [46]

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Thank you, Lard. Albert, yes, we did update our assumptions in the fourth quarter. It's nothing special just our regular assumption review process, and we did also see in 2018 quite a few mortality tables being published, and we did have a small update, and our assumption reflects the latest available information and our experience, broadly neutral for the Dutch Life businesses.

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Operator [47]

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Your next question is from Mr. Bart Jooris of Degroof Petercam.

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Bart Jooris, Banque Degroof Petercam S.A., Research Division - Analyst [48]

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Most of my questions have been asked. Could I just get some additional comments on -- is there a specific reason why there are no private equity dividends this quarter, and should we some kind -- see some kind of a catch up in the first quarter of this year?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [49]

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Delfin?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [50]

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No, the short answer is no. No special reason. Private equity are volatile. So no particular reason.

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Operator [51]

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The next question is from Farooq Hanif, Crédit Suisse.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [52]

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Sorry, just one follow-up question. Can you give us some guidance on the tax rate given the changes that are going on in the Netherlands, I mean, on an IFRS basis?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [53]

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Yes, thanks, Farooq. So Delfin, Can you do that?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [54]

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Well, I mean the corporate tax rate has been announced and agreed, that will decrease to 22.55% in 2020, and then it will decrease to 20.5% in 2021. And as I think I mentioned before, this had a negative impact in our solvency, but obviously, that will result into lower tax charge going forward. So I think that's a positive change.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [55]

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So we can broadly use these numbers with an adjustment for other territories, is that how she we should model it?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [56]

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Yes, so I think -- keep in mind that effective tax rate in the Netherlands has always been relatively lower than 25% because of the investments. Because some of them are tax-exempt for the gains. And the investment portfolio on equity above 5% is relatively high. But indeed, proportionally, for the Netherlands, it will reduce by 4 point percentage by 2020.

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Operator [57]

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The next question is from Mr. Ashik Musaddi, JPMorgan.

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Ashik Musaddi, JP Morgan Chase & Co, Research Division - Executive Director and Co-Head of European Insurance Equity Research [58]

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Delfin, Lard, just one follow-up question on M&A. Now if you want to think about like any M&A potential in Holland, I mean, would you have a wish list like you want to do in DNC? You want to do in individual Life? Any thoughts on that end? And where would you be restricted to do M&A because of the market share in Holland? I'm just talking about Holland, nowhere else.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [59]

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Don't forget, Ashik, that please, may I remind you that we took a very important step in the consolidation of the industry in 2017. Very willfully, as you know, and we're very pleased with the acquisition that we have done, because we believe we have a very strong platform. So whatever consolidation will happen in the Netherlands, we have an outstanding strategic position to start with. And we fully focus on integration benefits from that business. Now in general, anywhere else -- we are -- so everywhere we are looking for opportunities if they are presenting themselves and with a priority on markets where we have a presence and obviously, in those cases as we assess them at their own merits, antitrust considerations are always a part of that.

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Ashik Musaddi, JP Morgan Chase & Co, Research Division - Executive Director and Co-Head of European Insurance Equity Research [60]

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Okay. Just one question. I mean, would there any restrictions on any businesses, I think, because, for example, in group pension you can't do that because you already have 30%, 35% market share. Any areas where you have restrictions?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [61]

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Well, those are considerations that we would take if an opportunity like this is in front of us and if we are evaluating that opportunity. These, let's say, these considerations are not just 1 restriction. You need to think through how that would evolve. It's a more complex consideration you need to take there.

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Operator [62]

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There are no further questions. Mr. Friese, back to you, please.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [63]

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Yes, thank you, all for being on this call and for asking your questions. Now before we end the call, let me just conclude by saying that we have achieved a lot in 2018. Both in terms of financial performance and in the progress that we've made to integrate Delta Lloyd. We will continue to focus on delivering on our strategic priorities and on creating long-term value for all our stakeholders. I wish you all a pleasant day.