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Edited Transcript of NN.AS earnings conference call or presentation 15-Nov-18 6:45am GMT

Q3 2018 NN Group NV Earnings Press Conference

Nov 16, 2018 (Thomson StreetEvents) -- Edited Transcript of NN Group NV earnings conference call or presentation Thursday, November 15, 2018 at 6:45:00am 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

* Benoit Petrarque

Kepler Cheuvreux, Research Division - Head of Benelux Equity Research

* Cor Kluis

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

* Farooq Hanif

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

* Henry Heathfield

Morningstar Inc., Research Division - Equity Analyst

* Jason Kalamboussis

KBC Securities NV, Research Division - Equity Analyst

* 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

* William Hawkins

Keefe, Bruyette & Woods Limited, Research Division - MD, Head of European Insurance Research and Senior Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's analyst conference call on its third quarter 2018 results. (Operator Instructions)

Before handing this conference call over to Mr. Lard Friese, Chief Executive Officer of NN Group, let me first give the following statement on behalf of the company.

Today's comments may include forward-looking statements, such as statements regarding future developments in NN Group's business, expectations for its future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. Any forward-looking statements speak only as of the date they are made and NN Group assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or for any other reason. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities.

Good morning, Mr. Friese. Over to you.

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

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Thank you, operator. Good morning, everybody, and welcome to this third quarter analyst call. I will start today's presentation by talking about the highlights of the third quarter results and the business developments in the past quarter. Delfin Rueda, our Chief Financial Officer, will then take you through the details of the financial performance and talk about the free cash flow and capital position. 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's move to Slide #3, the highlights. NN Group's operating result of the ongoing business for the third quarter of 2018 was EUR 463 million, which is up 7% compared with the same quarter last year. The higher operating result was driven by improved underwriting performance at Netherlands Non-life in both the Disability & Accident and the Property & Casualty books as well as EUR 48 million of private equity and special dividends of Netherlands Life.

Lower expenses also contributed to the increase as we have continued to extract the synergy benefits from integrating Delta Lloyd. We achieved further cost savings of EUR 33 million this quarter, bringing the total cost reductions in the business units in the scope of the integration to EUR 269 million compared with the full year 2016 expense base. We are, therefore, progressing well towards our target of EUR 400 million by the end of 2020.

In terms of commercial performance, total new sales in the third quarter amounted to EUR 328 million, down 14% from the same period last year. This was mainly due to increased competition in the COLI market in Japan as well as lower volume of group pension contracts up for renewal in the Netherlands Life, which as you know, are skewed to the first quarter of the year.

Our balance sheet and capital position remains strong. NN Group's solvency ratio at the end of the third quarter was 239%, up from 226% at the end of the second quarter of 2018, reflecting operating capital generation and positive market impacts. Free cash flow to the holding company was EUR 293 million, bringing the cash capital of the holding to EUR 1.9 billion at the end of the third quarter.

Let's move to Slide #4. Our ambition is to be a company that truly matters in the lives of our stakeholders. For our customers, this means developing innovative solutions and value-added products that meet their needs. Let me give you some examples of how we're doing this across our businesses.

NN Bank has recently launched mortgage products, specifically geared to the needs of senior citizens and for its patriots wanting to settle in the Netherlands. A new accidental health insurance is being sold online in Poland and is a unique solution for children covering a broad range of accidents and care assistance.

We also look for ways to enhance the customer experience. For example, our Non-life business in Belgium has a service called My Advisor@Home, whereby the adviser is available within 24 hours to assess the damage and he takes care of all the necessary arrangements and repairs throughout the claims handling process. Our asset manager, NN Investment Partners, uses partnerships to support its growth ambitions and to reach customers through new channels. For example, in Japan, where NN IP and Rakuten Securities have announced a new investment service for retail investors. We take our social and environmental responsibility seriously. ESG factors are embedded in our investment process and we are also incorporating these in our products.

BeFrank is the first pension provider to introduce a sustainable impact dashboard, which allows employees of pension schemes to monitor the impact of their contributions on waste production, water consumption and CO2 emissions.

Let's now turn to Slide 5. As you know, we have a target to reduce the administrative expense base for the business units in scope of the integration by EUR 400 million by the end of 2020, of which at least half by the end of 2018. The integration of Delta Lloyd is progressing well. So far, we have reduced expenses by a total of EUR 269 million compared with the 2016 expense base. Looking ahead, we will to continue to drive efficiency throughout the organization. However, please bear in mind that the expense reduction will not always be linear from quarter to quarter, and some units may at times see expense increases to support growth and make the necessary investments.

We have submitted the application to include Delta Lloyd Life and Non-life in our Partial Internal Model, and we are on track to have this expanded Partial Internal Model approved by the end of this year. This will allow us to complete the legal mergers of the Dutch Life and Non-Life entities in 2019 as planned.

I will now hand you over to Delfin Rueda. Delfin, over to you.

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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 just start with NN Group's third quarter operating results of the ongoing business, which was 7% on last year at EUR 463 million. This increase was driven by an improved underwriting performance at Netherlands Non-life, higher dividends at Netherlands Life as well as a reduction in administrative expenses. This was partly offset by a lower technical margin of Netherlands Life as well as lower operating result at the Insurance Europe and segment Other, mainly due to nonrecurring benefits in the third quarter of 2017.

The net result of EUR 788 million represent an increase of 7% on last year. In addition to the higher operating result this quarter, we also recognized an additional divestment result of EUR 56 million related to the sale of ING Life Korea.

Moving on to Slide 8, I will take you through the third quarter performance of the individual segments. Starting as usual with our largest segment, Netherlands Life hosted a higher operating result, supported by EUR 48 million of private equity and special dividends as well as lower administrative expenses. This was partly offset by a lower technical margin as last year included some nonrecurring benefits and favorable mortality experience variances. The operating result of Netherlands Non-life increased to EUR 46 million versus EUR 1 million a year ago, reflecting an improved underwriting performance in both Disability & Accident and Property & Casualty and also lower administrative expenses.

The current quarter also benefited from favorable claims experience and a EUR 5 million private equity dividend. It is encouraging to see that both D&A and P&C reported a combined ratio below 100% this quarter with a total combined ratio coming to 97.1%.

Needless to say that the claims experience is volatile from quarter to quarter and that we will continue to implement measures to structurally reduce the combined ratio to 97% or below.

At Insurance Europe, the lower operating result reflects a lower investment margin and EUR 5 million of nonrecurring benefits related to the Life business increase in the third quarter last year. The lower operating result of Japan Life was mainly due to higher DAC amortization on surrenders, which was partially offset by higher fees and premium-based revenues driven by higher in-force volumes.

The operating result of Asset Management of EUR 43 million was due to lower fees, partly compensated by expense reductions.

Finally, the operating result of the segment Other was EUR 28 million versus EUR 41 million last year, which included a total of EUR 38 million of nonrecurring benefits compared with EUR 14 million in the current quarter. This quarter also reflects higher results at the reinsurance business. On the other hand, the banking business saw continued pressure on the interest margin, partly compensated by lower administrative expenses.

Moving now to the next slide, which shows our cash capital position. The holding company cash capital increased to EUR 1.9 billion at the end of the third quarter of 2018 from EUR 1.8 billion at the end of the second quarter. The free cash flow during the third quarter was EUR 293 million, driven by EUR 338 million of dividends received from subsidiaries. This was partly offset by EUR 193 million of capital flow to shareholders, representing the cash part of the 2018 interim dividend of EUR 127 million and shares repurchased in the current quarter for an amount of EUR 66 million.

As always, details of the dividends upstreamed by segment can be found in the appendix of this presentation.

To finalize my presentation, I will take you through the developments in NN Group's solvency on Slide 10, starting with the movement for the quarter. Our Solvency II ratio increased to 239% at the end of the third quarter, up from 226% at the end of the previous quarter. Operating capital generation and market impacts, each added 7 percentage points to the ratio this quarter. Markets had a positive impact to own funds, mainly driven by the widening of peripheral or government bond spreads, to which we are underweight compared to the reference portfolio. Real estate revaluations and higher interest rates also contributed positively to the ratio.

I will finish off by mentioning a couple of other items that may be relevant. Firstly, let me remind you that the 2018 interim dividend paid in September was already deducted from the Solvency II ratio at the end of the second quarter.

Furthermore, as Lard mentioned, we are on track to get approval for including the main Dutch and Delta Lloyd entities in the Partial Internal Model by the end of this year. This will be taken into account in our solvency ratio when approved.

And lastly, we currently expect that the proposed corporate tax rate reduction in the Netherlands will have a negative upfront impact on our Solvency II ratio if and when enacted. Economically, of course, this will be positive, resulting in higher capital generation and profits over time.

And with that, I'll pass you back to Lard for the wrap up.

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

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Thanks, Delfin. NN Group has delivered another solid set of results for the third quarter of 2018 posting an increase of 7% over the same quarter last year, with Netherlands Life and Netherlands Non-life reporting higher operating results.

The integration of Delta Lloyd continues to progress well. Total expense reductions to date amounted to EUR 269 million as we continue to extract the synergies of the integration and drive efficiencies throughout the organization. Our balance sheet remains strong, with a cash capital position of EUR 1.9 billion and a Solvency II ratio of 239% at the end of the third quarter. We are on track to have the expanded Partial Internal Model approved by the end of this year and to complete the legal mergers of Dutch Life and Non-life entities in 2019 as planned.

This quarter's performance confirms that we are progressing well in executing our strategy, which focuses on successfully integrating Delta Lloyd, further improving the operating performance of all of our segments, accelerating the transformation of the business model and continuing to allocate capital rationally.

Now before we go into Q&A, let me just mention the second press release that we issued this morning, in which we announced the termination of the warrant agreement with ING for a consideration of EUR 76 million. As you are aware NN and ING entered into this warrant agreement at the time of the IPO in 2014. We are pleased to have completed this transaction as it eliminates a potential share dilution.

I will now open the call for your questions and hand over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Mr. Cor Kluis, ABN AMRO.

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Cor Kluis, ABN AMRO Bank N.V., Research Division - Analyst [2]

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Cor Kluis, ABN AMRO. Congratulations by the way with solving the warrant for this. And for -- there are a couple of questions, first of all, on the bank. Could you give some more clarity about the dividend that's payment from the bank going forward taking into account that the capital consumption of the growth of the bank is not so large anymore because year-to-date, the mortgage book has been quite flattish. So what can we expect from dividend payments from next year onwards, and also maybe related to that, what might be the Basel IV impact on a fully diluted basis for the bank? It will not be much probably because you already extended that formula, but could you have an indication how the 16.4% CET1 ratio might change as a result of Basel IV. And my second question is about Solvency II. Could you give a little bit more clarity about the factor in the fourth quarter you highlighted like the corporate tax rate effect, what percentage of effect could that be on the Solvency II ratio and the Delta Lloyd due to Partial Internal Model in the fourth quarter? What might that be? Or would it might be compensate the corporate tax effect? And if you might have done some more thinking about some reinsurance deals in the fourth quarter? And what the market effects might be in the Solvency II in the fourth quarter? Those are my questions.

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

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Yes. Thank you, Cor. So I'm going to hand over to Delfin, actually for both questions. So Delfin, the bank and Solvency II.

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

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Thank you, Cor. So you're right that the bank has already found a level of profitability and return on equity that allows them to fund their own growth, and in addition to that, to contribute further to dividends going forward. So they started with a small dividend in the last quarter in Q2 of EUR 8 million, and we will expect that depending on their profitability and the evolution on the solvency, this will continue to be the case. But as you'll have to, of course, assume that these are going to be relatively moderate dividends coming from the bank going forward. It's well capitalized, as you said, with our common equity Tier 1 ratio of 16.4%, and you are also absolutely right that the Basel IV won't have a material impact on that. On your question on Solvency II, on the corporate tax rate, reduction first, maybe a caveat to mention that still this has not been approved by the Dutch parliament, but we do expect that the changes in the corporate tax are going to come through, and if we were to look at the impact that the current proposal of corporate tax reduction will have on our Solvency II ratio, it will be around 10 percentage points, but also very important to indicate that this is obviously a positive aspect in terms of the contribution to the net profit and the capital generation going forward. Obviously, that will depend also at the level of the solvency ratio that is very sensitive to the level of the solvency ratio when these taxes are going to be implemented as it affects mainly the Solvency Capital Requirement due to the reduction on the VTA. In terms of the PIM, as we have mentioned in the past, we continue -- in the process, we do expect to have approval before year-end. So we are doing everything on our hands to get into this goal and don't forget that there is a benefit that is currently in place on the standard formula on the calculation of the SCR under the standard formula for Delta Lloyd Life and that benefit that at the end of last year was EUR 350 million will be lost, that's why we have said that there's going to be -- we expect maybe a net positive at a moderate impact due to the introduction of the PIM.

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Cor Kluis, ABN AMRO Bank N.V., Research Division - Analyst [5]

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The market effects in the fourth quarter?

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

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Market during the fourth quarter was 7 percentage points. The main impacts were due to the reduction on the spreads of government bonds, particularly peripheral bonds, but also we benefited for revaluation of equity and real estate.

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Cor Kluis, ABN AMRO Bank N.V., Research Division - Analyst [7]

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And the impact of the, maybe just to add, the impact of the movement score to date has been broadly neutral on our solvency ratio, Cor.

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Operator [8]

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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 [9]

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Sir, about -- what you are thinking about M&A at this point? I mean, clearly, there are few opportunities at the moment in Belgium and in Holland, and those are not that big M&As as well. We're talking about EUR 300 million, EUR 400 million. So can you share some thoughts about what you're thinking and how you position for those potential deals, any thoughts on that, would you be considering, not considering? So that's the first one. Second question is with respect to debt. I mean, one of the investor concerns on NN Group is around your high leverage. I mean, the way we look at high leverage is your Solvency II is fully capped, and on an average basis, it looks a bit high. So I mean, what can you potentially do to reduce your leverage and would that be a hurdle -- leverage ratio, would that be a hurdle to do any sort of buybacks early next year, any thoughts on that would be great? And then last thing, the last question would be around your Solvency II capital generation. I mean, this year for the first 9 months, you have generated around 36% -- 39% capital or 40% capital and that too is net of dividend, so how should we think about what really worked this year basically? Why is the capital generation so high?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [10]

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Okay, Ashik, thanks for your questions. I'm going to take the first one on the M&A, and then Delfin will talk about the leverage and about the capital generation, right. So first on the -- on M&A, if we have an opportunity to strengthen our business, we will look at it and evaluate it carefully. And if it makes sense and it complies with the financial and nonfinancial criteria that we have for this, then we will look at it and we will transact. The same thing, it happened with Delta Lloyd at the time. We've also, last quarter, announced 2 smaller transactions in the Czechoslovak Republics. Our priority is in markets where we already have a presence, because we believe that you understand the business that you would acquire and you can extract synergetic benefits and increased scale in the markets that you're present. We would evaluate opportunities in the Netherlands, but also outside of the Netherlands in markets where we already have the presence. Please note in the Netherlands, our priority is obviously the integration of Delta Lloyd and extracting to full value of equity. If we can strengthen the business further, we will look at that. Delfin, over to you.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [11]

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Yes. Thank you, Ashik. Let me for a moment disagree on your assessment that there is a high level of leverage. We are certainly very comfortable with the level of debt. If you look at our fixed charge coverage ratio of close to 15x in this quarter for the last 12 months, you know we calculate it always on the last 12-month basis. That is certainly quite coverage of the interest expense, also taking into account that NN Group is especially cash generative in relationship to the IFRS results. The fact that the majority of the operating result converts into actual cash to the holding company than for remittance basically gives you an actual interest covered, which is very high. If you combine that with the fact that the cost of debt is relatively cheap at this point of time and the fact that we have a very high level of financial flexibility due to our solvency, the level of cash capital at holding, I don't think that the level of debt can be categorized as being high or of any concern, which -- that answers you and your question in terms of any plans in terms of reducing the level of debt, we currently don't have. I think that we are comfortable with the current debt structure.

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Ashik Musaddi, JP Morgan Chase & Co, Research Division - Executive Director and Co-Head of European Insurance Equity Research [12]

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Delfin, but is it fair to say that if -- what you're saying if I understand it correctly, is it fair to say that leverage will not be a constraint if you were to consider doing a share buyback?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [13]

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Yes. So that is -- leverage is not a constraint for that. Then in terms of the Solvency II capital generation, you're right, in the 9 months up to September, we have had a very positive growth of the solvency ratio, increased by 40 basis points. 17 percentage points was related to operating return and we have very good positive impact related to market. But I think that if you were to look back to the time since the introduction because markets are always -- can be volatile, can be positive or negative and we have gone through a period of relatively positive impact. But if you were to look at from the start of introduction of Solvency II, we have actually in these, I think, 11 quarters, operating returns increased by 52 percentage points where markets only contributed 22 percentage points. So it will come up or down, but it's a measure. Or if you were to look at it -- at NN Group in the current form, which is after the acquisition of Delta Lloyd, i.e., from the second quarter of 2017, basically, we also have 43 percentage points increase in the capital generation of which, 29, the majority of it came from the operating return with only 21% coming from market. So the explanation, this quarter is a strong operating capital generation, but also positive impact on markets as you mentioned.

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Operator [14]

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The next question is from Mr. William Hawkins, KBW.

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William Hawkins, Keefe, Bruyette & Woods Limited, Research Division - MD, Head of European Insurance Research and Senior Analyst [15]

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I've only got 1 question really. Is there any -- are there any important actions that are awaiting the legal entity mergers next year before they can be executed? So I'm kind of thinking in terms of where you are with the Delta Lloyd operational integration process? Is there any operational action that has to await legal entities? Your expense efficiencies so far have been running incredibly well, but I wonder if there's going to be the need to increase the investments once the legal entities have merged? And also I don't know if any capital management decisions that you may make have the legal entity mergers a precondition?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [16]

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Yes, thanks, Will. As we've said before that we aim to -- our objective is to merge the legal entities of the large Life and Non-life businesses in the Netherlands in 2019. There's a lot of things that need to happen for that. We are working toward that. It's -- so as Delfin already mentioned and I mentioned in my script on the slides, Partial Internal Model approval and expansion, I think, is an important step in that. Of course, we need to obtain a declaration of no objection from our regulator for those legal entity mergers and there's a number of other steps that we need to do. Operationally, we are progressing well and the operational integration itself is not, let's say, a factor that would be hampering the legal entity merger. So in that sense, we're on track. When it comes to the expense reductions, we have -- we are very pleased to see that we're now at EUR 269 million of expense reductions and well on our way of the EUR 400 million target by the end of 2020. We do need to be mindful though, and we're very pleased, I compliment my teams for doing so. Having said that, we do need to caution that we're now entering into the complex part of the integration process, which is also due with migrating technology platforms, migrating portfolios into technology platforms of companies that have been in existence for a very long time. So I would be a bit careful to just look at the extrapolation of the past quarters and take the same speed for the cost reduction. So while we're confident that we will get to the EUR 400 million back to the end of 2020, you should be careful just extrapolating as a proxy the speedup, which we did that over the last couple of quarters. Also indeed, it may be volatile in that sense in the quarters over time because you do need to invest also to get to the underlying expense reductions in technology, for instance. But so far, I must say, we're well underway.

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William Hawkins, Keefe, Bruyette & Woods Limited, Research Division - MD, Head of European Insurance Research and Senior Analyst [17]

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And just on the part of that question, with regards to how you manage capital, is the legal entity separation at the moment and then integration at all relevant to how you think about capital management or is it just a sort of ticking the box irrelevant to how you're managing the group as a whole?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [18]

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The main benefit of managing in -- if the legal entities are merged, the main benefit that we have for that is operational. And in governance, it just simplifies life in that sense, which I think is helpful and that's the main benefit of it.

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Operator [19]

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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 [20]

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2 questions, please. The first is on the capital generation. Again, if I could come back on that, the EUR 0.3 billion own funds (inaudible) first of all and (inaudible) all in there? And just linked to that, to what extent are the cost savings already captured in that number? It's not entirely clear because some of them are reflected upfront in the best estimates at least for the Life business that's mostly the case? And then secondly, on the capital ratio of the Dutch Life entities, wondering if you could provide pro forma for the merged entity including the impact of the legal merger? And is there any target you have in mind for managing the Dutch entity going forward?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [21]

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Yes, thank you, Matthias. Delfin, can I hand it over to you for this?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [22]

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Yes. Thanks, Matthias. The question on the capital generation, the approximately EUR 300 million. No, it's not rounded up. It's actually slightly up. In terms of the cost savings already captured in the operating capital generation, you're right, it depends. Everything that is related to savings in the Life business and also the long-term Non-life part, as long as it was already reflected in the assumptions, do not have an additional benefit. Any variation, meaning if cost savings are larger than what is assumed on those assumptions, then they would be reflected when the assumptions are reset. However, if both the short-term and Non-life business as well as the other areas, the holding, the Asset Management, the bank, Belgium, to a large extent, they are being reflected as they are being generated. In terms of the pro forma of the merged entities in the Netherlands, it will be a simple add-on of the own funds, and the SCR of both entities will come to 235% solvency ratio. And we have not set any particular target, but you have seen that the dividends coming out from Netherlands Life increased from usually EUR 150 million per quarter, it increased to EUR 175 million. Obviously, the level of solvency is high, and as we have said, it is our priority to maintain stable payment from the subsidiaries. Always, we aim to, over time, release some of the surplus capital in the different legal entities.

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

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Okay, Matthias, I hope it was clear. Just to make sure there is no misunderstanding, so the EUR 0.3 billion, as Delfin indicated, is slightly rounded down and not rounded up. So it's, in fact, a little bit north of the EUR 300 million.

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Operator [24]

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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 [25]

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On the market movement, can you explain what the percentage point impact was from real estate revaluations? And remind us what's going on there and what could continue to happen going forward? Secondly, on capital management in your answer to Will's question, I mean, there is a dependence, isn't there, because if you merge entities, you said that you will reduce your cash target of the holding. So I was just wondering what your latest thoughts are on that? And if you can give us any guidance? And lastly, just on -- again, the question on operational capital generation, at what point are you going to feel confident in giving us kind of a vision of what you see as a regulus move capital generation number every quarter because, obviously, kind of a lot of your peers do that. So I was just wondering particularly whether you would be willing to say, look this is it?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [26]

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Yes, so on the first and the third question, Delfin, but it is maybe also good to give Jan-Hendrik an opportunity. So can you do the second question about the confirmation of dependence for the merger of the legal entities, et cetera?

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Jan-Hendrik Erasmus, NN Group N.V. - Chief Risk Officer & Member of Management Board [27]

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Yes, Farooq, you're right to refer to the 1:20 requirement, but at the moment, you see the solvency of both the legal entities in the Netherlands for Life entities is very strong. So at the moment, that 1:20 stretch requirement is not having a big impact, and this will, therefore, also not have a big dependency here for the legal merger.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [28]

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Just going back on that, you -- I think you did say that you would give us a new target for the holding cash, if that happens or are you saying that's already happened?

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Jan-Hendrik Erasmus, NN Group N.V. - Chief Risk Officer & Member of Management Board [29]

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We are going to stick to our guidance on the target cash capital. I mean, the range of $0.5 billion to $1.5 billion remains the range. What we said is that we might be comfortable at different parts of that range through time, but certainly, the range of $0.5 billion to $1.5 billion is something we plan to leave unchanged.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [30]

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And with that, Farooq, I'd like to hand over to Delfin for the other questions you have about market movements and the potential run rate numbers.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [31]

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Yes. Thank you very much, Farooq. Real estate revaluations in the quarter represented a little bit more than 1 percentage points on the market movement. What to expect going forward is impossible to say. It is very much dependent on what is going to be the devaluation of real estate, particularly commercial real estate going forward. On the range for the cash capital at holding, already Jan-Hendrik explained clearly that we will maintain that range between the EUR 0.5 billion and EUR 1.5 billion. And in relationship to our run rate of operating capital generation, as you know, it's relatively difficult to say. Although by now, you have already got, I think, 11 quarters of operating capital generation and you have seen what is the evolution. And when I look on this capital generation, that's been around the EUR 300.3 billion, around EUR 300 million over the last quarters. On capital generation, you know that we have also benefited from regular release on the Solvency Capital Requirement, which obviously depends on the speed on the runoff of the portfolio -- the individual Life portfolio in the Netherlands, but also of the runoff of the Japan Closed Block VA portfolio, and keep in mind, as we have mentioned that by 2019, this runoff is very much coming to an end. And as a consequence, that benefit of decreasing the SCR will be more mitigated. So I think that in terms of operating capital generation, what you have seen this quarter in terms of the movement on the forms and the change in Solvency Capital Requirement is nothing unusual. Whenever there is something special, we tend to mention there.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [32]

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And going just on back -- going back on the real estate revaluation, obviously, the numbers in market variance will be the one that's above your long-term assumption. Can you remind us what your long-term assumption is in real estate?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [33]

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Yes, for real estate, it's 4.4% assumption. And obviously, what it comes through the market variance is whatever additional rental deal that comes on top of this 4.4%, but also their revaluation of the real estate as well. So the combination of these 2 will come through market variances.

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Operator [34]

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The next question is from Mr. Benoit Petrarque, Kepler Cheuvreux.

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Benoit Petrarque, Kepler Cheuvreux, Research Division - Head of Benelux Equity Research [35]

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So the first one is again on the own funds capital generation. I think you've been consistent at around EUR 0.3 billion, even a bit enough of that. We know -- looking at the cost cutting in the pipeline, when do you expect to reach the rounded EUR 0.4 billion? Will that be early 2019? Could you talk around that? And also year-to-date, could you provide kind of the figure because we have rounded figures per quarter, but I'd like to get a kind of year-to-date figure? And then the second one was on the dividends from this -- the Life entities. So the combined Solvency II ratio is 235%, if I understood correctly, is there any room for distributing the excess capital from the Life subsidiary post-merger? And then, sorry, I missed -- I joined the call a bit late, but what was the reason of the weak technical margins in the Netherlands? That will be useful.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [36]

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Okay, Delfin, 4 questions. I think, can you take them?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [37]

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Yes, good. Thank you, Benoit. So I hope I won't forget any of them.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [38]

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I hope you remember.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [39]

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In terms of the operating capital generation and when we will reach the EUR 0.4 billion, difficult to say. There are different dynamics here. You know that the capital generation is driven by changes in interest rates and express for every single quarter. So the impact on the UFR drag, the release of the risk margin as well as the expected market deal on our credit fixed income securities including government bonds vary actually from one quarter to another. So that gives some variability there. Also within this operating capital generation, you have new business, the operating variances and the contribution from Japan Life Asset Management and the pension business. So obviously, we do expect that as we move to higher-yielding assets, that we will have an additional contribution. We also expect that with improvements in the underwriting result on our Non-life business that we will have some improvements there, and also with the selective growth in areas like Europe and Japan, there you will have all the aspects like the release of the Solvency Capital Requirement as their runoffs of Japan Closed Block VA, as I mentioned before, will reduce, and to some extent, to their movement to higher-yielding assets, the SCR -- already the growth of new business (inaudible) might not contribute as much to the reduction or even add to the SCR. So there are a few parts, but I think, overall, our targets and objective is to increase, of course, this operating capital generation over time, driven mainly by the improvement in the operating results of the company as well as the movement to higher-yielding assets. In terms of second question...

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Benoit Petrarque, Kepler Cheuvreux, Research Division - Head of Benelux Equity Research [40]

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The year-to-date figure for the operating capital generation.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [41]

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Year-to-date figure for the operating capital generation is around EUR 900 million. And the combined ratio of 235%, of course, it provides room for excess capital dividends, but as I said before, we do prefer to have a regular contributor to dividends to the holding company. So we are happy with the current rate of dividends coming from this segment, and for the time being, we'll maintain it like that until we change, of course, that approach. In terms of the technical margin in Netherlands, I think we gave an indication to expect between 40 and 45 percent -- percentage points (sic) [EUR 40 million and EUR 45 million], and this is basically what we have seen this quarter. So nothing too unusual. There was better results in the past, but this was a little bit higher in the previous quarter. But between EUR 40 million and EUR 45 million -- between EUR 40 million and EUR 50 million, I think it's something that is reasonable with the inherent volatility for this technical margin.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [42]

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And just to avoid misunderstanding, Benoit, Delfin, slightly, this is Netherlands Life we're talking about and it's millions, not percentage. So it's EUR 40 million and EUR 45 million.

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Operator [43]

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The next question is from Mr. Albert Ploegh, ING.

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

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3 questions from my end. First one on the private equity gains. Can you remind us what, let's say, at the end of Q3, more or less, the size of the group is and how you accounted for? Is it basically the equity matured or the fair value accounting? So I'd like to understand whether it's really exit gains versus fair value gains that could impact the quarterly numbers? So that's the first question. The second question is on Japan. On the COLI market, you've mentioned increased competition in Q2, I mean, the new sales were at still, I think, 18%, if I'm not wrong there, and you mentioned the bancassurance generally being strong in the Sumitomo partnership. So can you help us a bit to understand what's going on in the Japanese COLI market? And finally, on the Dutch Non-life business, clearly very good underwriting that we sold, premiums are still pretty flattish, okay, but can you maybe give some gut feeling, let's say, on the pricing trends. So what is the underlying really growth in gross written premiums? And what is the impact, let's say, of pruning the portfolio, which of course, has a negative impact on the gross written premiums?

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

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Yes, Albert, private equity, I think, that's Delfin, Delfin, can you do private equity? I'll take care of the Japan question and the Non-life question.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [46]

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Yes, thank you very much, Albert. So I think you're touching into a little bit of a complicated matter of how this flows through the profit and loss account. So we'll be happy to explain that more extensively off-line, maybe I'll try quickly. The majority of our private equity investments are classified as associates and joint ventures, and a smaller amount, they are classified as available for sale. So depending -- if the dividends comes from associates and joint ventures, all from available for sale, the treatment is slightly different. So for associates and joint ventures, the dividends are reflected in the investment margin, but at the same time, this is offset by a negative revaluation below the line. So that basically have not -- have no net P&L impact, but it is reflected in this manner. However, for those that are available for sale, as -- for example, it is the case for our investment in Korea, these dividends are reflected in the investment margin, but are only offset by a change in the revaluation reserve basically with a lower equity value on the balance sheet. I do expect that with this clarification, you got a bit of a feeling that how this comes, but we'll be happy to explain it off-line as well.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [47]

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Yes. So on the Japan COLI. Let's first talk about the Japan COLI. The -- our Japan business over the last years has seen a marked growth in the segment that it has been operating in for 30 years. So we're quite a specialist and very well positioned in that segment. We have seen competition increasing, and as you know, we prioritize margins over volume, and I may also point out that we have moved and shifted to a different kind of product mix to improve the margins, and as -- in Q2, we have presented a value of new business increase of 36% to demonstrate our efforts there. But indeed, we are seeing more competition, and of course, we're well positioned. So we're fighting against that competition as well. So we've launched, for instance, a new product last week to maintain commercial momentum. And this is something that will work through, and also the relationship with Sumitomo [with also the other] distribution channels is working very well, and we have good confidence in our growth prospects in that market in the future. When it comes to the Dutch Non-life area, well, as Delfin mentioned, I think, earlier on the call, we're quite pleased with the way that the program that we've rolled out and announced a year ago at the Capital Markets Day is taking effect. At that time, we said that we need 12 to 24 months for the measures to take their full effect and it's sort of wide range of measures, as you know, combination of cost reductions, pruning indeed is the portfolio for those products and that we believe we don't -- we can't get an appropriate return on through the cycle, and also looking at each risk, making sure that it's priced well, price increases where needed and where we believe is appropriate. So we're doing a lot of things to do that. And if you look at the last 4 quarters actually, and I know that events like storms, et cetera, are part and parcel of this business, but in order for us to gauge whether the measures are taking effect, we're actually taking -- looking through the storm effect, and then you see for 4 quarters in a row already step-by-step improvement. And this quarter, I think the important thing that we've seen both Disability & Accident and P&C improving. In terms of the underlying premium, indeed, it's flattish as a total, which is a combination of the pruning on the one hand, but then also price increases and premium increases on repricing risk as one of those measures that is coming through. So the overall is flattish.

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Albert Ploegh, ING Groep N.V., Research Division - Research Analyst [48]

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But do you think you're getting close to some kind of inflection point to show some more meaningful gross written premium growth? Or is it still too early to expect that in '19 for example?

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

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That's indeed too early to say that. Don't forget that we're really focused on profitability improvement here. Our objective is to structurally improve this business with a combined ratio of 97% or below, and that's our objective for this business to make sure it's structurally in a good and profitable situation.

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Operator [50]

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The next question is from Mr. Henry Heathfield, Morningstar.

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Henry Heathfield, Morningstar Inc., Research Division - Equity Analyst [51]

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Just on the back of actually that last question on Non-life, just kind of interested, and particularly, on the pricing in the P&C portfolio that you've put through and whether that's kind of being finalized or how far through that are you basically? Whether there's more to come more broadly in the Non-life segment? And then the second question is on the Motor business that seems to be improving quite nicely, but the operating environment in the Netherlands seems to be quite harsh one. And I was wondering, I think, basically, average claims on the liability side have increased quite markedly around 40% over the past 4 years because of the discount rate and whether you'll be able to hold on to the price improvements that you put through if the discount rate starts to rise again and the average claims cost starts to fall?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [52]

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Yes, so, Henry, when it pertains to the overall environment, I would say what I observe is rationality improving in the market in general. In terms of how much -- how far along are we in the measures that we're taking to improve the profitability of this business, as I said, we haven't reached our target, right, and we want to have it 97% or below, don't forget the last piece of that as well, the 97% is one thing, but or below, we should not forget that either. And I want to have it structurally in that place and that's really our priority. So it is something that will take more time to -- for all those measures to be implemented and to take their full effect and as I -- the kind of guidance we gave for that last year is that we need like 12 to 24 months before those measures will take their full effect. So I think that's where we are. We're still working through this, happy with the progress, but still a lot of work to be done. When it...

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Henry Heathfield, Morningstar Inc., Research Division - Equity Analyst [53]

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Sorry, are you kind of -- are you just taking the pricing within Property & Casualty kind of going forward? Or will there be some more broader pricing improvements you think within the (inaudible)?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [54]

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Well, we are always evaluating the importance of having risks appropriately priced, whether they're on the P&C book or in the Disability & Accident book. So we go through this product by product, risk by risk, and that's how we work. The -- on the Motor business, yes, we saw an improvement this quarter on the Motor business. But again, also, there, we believe that we have not implemented all the measures on cost reductions, et cetera, that we aim to implement. Don't forget that we also want to build structurally a capability in a stronger place on using data analytics to consistently and more quickly react to any actions that we feel we need to take for migration of the risk, and as a result, the necessary pricing of that risk. So we will continue to work on that as well.

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Henry Heathfield, Morningstar Inc., Research Division - Equity Analyst [55]

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Do you -- I mean, do you think that on the average -- liability side, the average kind of claim on the liability side of the Motor book when that does start to come down, I mean, I think that will start to come down over the next kind of half decade or something, are you going to be able to hold on to that pricing that you've been put through? Or is that going to compress again?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [56]

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I think, Henry, that -- I'm not sure, but I think that this is more U.K. market-specific than I would say for our kind of business.

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Operator [57]

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The next question is from Mr. Bart Jooris, Degroof Petercam.

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Bart Jooris, Banque Degroof Petercam S.A., Research Division - Analyst [58]

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Basically, following up -- following on the last questions, if we look at the improvement of your combined ratio, we see that it is mostly due to decrease of the claims ratio. Could you say what part of this is due to the underwriting improvement as you also had a favorable claim experience? And the expense ratio actually went up year from year, when did you expect the expense ratio to decrease because that was from the impression of the Investor Day that it would take more time to improve the claims ratio and less time to truly improve the expense ratio? And then a small following question on the change in the corporate tax. Will there be a P&L impact? Your DTAs are relatively low. Your DTLs are higher. Are we seeing valuation movements there that need to be transferred to the P&L?

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

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Thanks, Bart, for your questions. So first, on the expense ratio, there was some noise, I think, in the expense ratio from last year given the Delta Lloyd acquisition. I think this is better to be explainable off-line, but I do see, and you can see that from the numbers, that we saw a decrease of the expense this quarter of the Non-life company of around 12%. So I think also there the expense reductions are taking place. When it comes to the overall movement of claims, we saw that the D&A combined ratio is 94.3%. So the claims improved compared with the last quarter and the comparative quarter in the third quarter of 2017. When you look at P&C, we've seen a gradual improvement that we'd a little bit of a good claims experience, especially in the fire book this quarter, which I think is important to mention. So the change in corporate tax rates and the P&L, Delfin?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [60]

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Yes, thank you very much, Bart. Of course, we're changing the tax rate. We have an impact on IFRS because the corporate tax rate, as you know, will be smaller, but at the time of introduction, it can also and it will also have some impact, but that will be a split between the profit and loss, and also another part will come through equity due to the impact on their revaluation reserves that is actually one of the largest aspect of the deferred tax liabilities and the (inaudible) of the balance sheet.

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Bart Jooris, Banque Degroof Petercam S.A., Research Division - Analyst [61]

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So you already gave -- quantified the idea of that?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [62]

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No, I think, I mean, if you look at it from the perspective of our balance sheet of what is the impact, it will not be that meaningful, but it is too early really to consider to have an appropriate estimate on that.

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Operator [63]

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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 [64]

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Sorry to come back on the private equity dividends, but there tends to be a habit to fully exclude them from your operating results whenever you report them. So I just want to follow up on Albert's question, and basically, ask you do you think it's fair if these are fully deducted. My understanding is that if there is no cash upstream basically from the private equity dividend side that you basically incorporate 0 in your operating results, I would say that a return of, I don't know, 10%, up to 10% would be quite reasonable on your EUR 700 million book? That's question one. The second one is on IFRS 17. It will probably be dragged out a little bit, but one of your peers in the Netherlands has shown that the shadow accounting is a pretty sizable offset on how the financial leverage ratio will behave after that adoption. I was just wondering, earlier on the call, you seemed quite confident on leverage. Is this something that will change that narrative or are you quite comfortable that on the IFRS 17, your leverage ratio will not go up too much? And the last question is really on the level of excess capital. I mean, we're approaching the levels where you basically were before you acquired Delta Lloyd. I was just wondering if your feelings about how your balance sheet looks like are similarly comfortable as compared to that point in time?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [65]

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Yes, I will hand over to Delfin in a minute, but about the habit, I hope you would agree with me that we're not apologizing for having good returns from our private equity book. So we're quite pleased with them. But I would like to hand over to Delfin on the questions you have.

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [66]

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Yes, thank you, Robin. You're absolutely right. Private equity and public equity dividends is part of our investment return and it will continue being part of the investment return. Maybe we are a bit guilty to highlight this. We were trying to provide useful information in order to see the variation from one quarter to another because these don't come always in the same quarter, thus don't come with the same amount in order to make you better informed of how these might be coming through. But absolutely, the returns from private equity will impact our IFRS, but also our Solvency II operating return on an ongoing basis. So it's a very important element of our investment portfolio. So it's not fair to exclude them from our investment return nor to our capital generation. The level of private equity by the end of September was around EUR 800 million. IFRS 17, we, of course, don't use shadow accounting, and the impact of IFRS 17 that has -- you might have already noticed yesterday the ISB announced a delay of 1 year on the implementation of IFRS 17 and IFRS 9 to 1st of January, 2022. And it is a bit early in order to see what impacts that will have as it will fundamentally change how we measure the abilities and profit recognition. So that applies to all insurance companies. So it will be closer to market value will be, but still maintaining difference with Solvency II. Your last question.

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [67]

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Yes. So Robin, on your last question regarding capital and the deployment of that, yes, we -- no doubt, we have a strong Solvency II ratio, which is increased driven by operating capital generation as discussed this morning. And by markets, the cash capital position is in a good place in the balance sheet overall as well. But as you know also, we said this morning, our focus is on the integration of Delta Lloyd on the improvement of the performance of the businesses and on accelerating the transformation to business model, and there is a lot to do on the integration. For instance, the largest units in the Netherlands, the PIM expansion I was mentioning this morning, the legal mergers of the Life and Non-life businesses and entities, especially in Netherlands. And as we said before, on deployment, capital in excess of our ambition will be returned to shareholders over time unless we can put it to work in value-creating opportunities.

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Operator [68]

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(Operator Instructions) And the next question is from Mr. Jason Kalamboussis, KBC.

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Jason Kalamboussis, KBC Securities NV, Research Division - Equity Analyst [69]

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I just got 2 quick questions, the one is on the Non-life side. When I look at the dividends that were upstreamed, it was EUR 8 million versus EUR 20 million in second quarter. I would have felt, can you explain -- I would have felt that you know with a better combined ratio, and basically, reflecting what we see in the quarter, I don't understand very much the difference with the second quarter? And second question is just quickly on the private equity, I think the banking (inaudible) has given a sort of guidance, would you give a guidance or shall we probably take as a more normalized level we saw last year or you prefer to leave it at the answers you have given so far?

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E. Friese, NN Group N.V. - Chairman of Executive Board & CEO [70]

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Delfin?

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Delfin Rueda Arroyo, NN Group N.V. - Vice Chairman of Executive Board & CFO [71]

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Thank you, Jason. Basically, the dividends that we pay in this quarter for Non-life were basically taking into account also results of previous quarters. So you don't just pay the dividend of net profits of the quarter. So I would not read too much into the level of dividend from Non-life as we do expect going forward that it will continue contributing regular dividends to the holding company, and as we have said in the past, this capital generation is more or less approximately to the level of their operating result in terms of the solvency of capital. Also take into account that the level of capitalization of the Non-life company is lower compared, for example, the level of capitalization of the Dutch Life entities, which of course, give us much more margin in order to have a more stable dividend quarter per quarter. In terms of the guidance for private equity dividends, I think, is maybe the only thing that I can mention is the guidance that we provided in terms of the contribution to our operating return, which was somehow higher, which is 6.5% expected return. So sometimes, we'll have significantly higher than that. Sometimes, we might have lower than this. And that difference on the Solvency II capital generation will be reflected in market variances.

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Operator [72]

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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 [73]

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Yes. Thank you very much, operator. I would like to thank everybody for their questions. And before we end the call, let me conclude by saying that we have reported another solid set of results for the third quarter of 2018. We're progressing well with the integration of Delta Lloyd and extracting the synergy benefits, and our balance sheet and capital position remain strong. Our focus remains on delivering on our strategic priorities and creating long-term value for all our stakeholders. I wish you all a pleasant day, and thank you very much for being here.