NN Group N.V. (NN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's analyst conference call on its second half year 2021 results. [Operator Instructions] Before handing this conference call over to Mr. David Knibbe, Chief Executive Officer of NN Group, let me first give the following statement on behalf of the company. Today's comments are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those projected in any forward-looking statement. Such forward-looking statements may include future developments in NN Group's business, expectations for the future financial performance and any other statements not involving historical fact. 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 or an offer to buy any securities. Reference is made to the legal information on the last page of the presentation. Good morning, Mr. Knibbe. Over to you.

Yes. Good morning, everyone, and welcome to our conference call to discuss NN Group's results for the second half of 2021. I am joined today by Delfin Rueda, our Chief Financial Officer; and Bernhard Kaufmann, our Chief Risk Officer. I will start off this presentation by looking at the strategic development in the past year as well as the financial highlights. Delfin will then talk in more detail about our capital position and the financial results of the group. After wrapping up the presentation, we will open up the call for Q&A. So let's start on Slide 3. We have made good progress in 2021 in further implementing our strategy of creating long-term value for all our stakeholders. We track this not only in financial terms, but also by aiming to achieve our ambitious targets for customer experience, employee engagement and contribution to society. Our customers are the starting point of everything we do, so it is essential that they are satisfied with our products and services we provide. We measure customer satisfaction based on Net Promoter Scores and aim for all 11 insurance business units to score above the market average by 2023. We still have a lot of work to do to reach this target, but we are happy to see an improvement in the second half of the year with 5 business units now scoring above market average while a further 3 units score on par. The brokers and advisers that we work with also play a crucial role in servicing our customers. We, therefore, continually build on our relationship with these partners, for example, by improving our service and digital capabilities. And this is reflected in high satisfaction scores, and we focus on improving this further going forward. Our employees have been working from home for most of the past 2 years. And we're proud to see that despite the pandemic, they have remained highly engaged and committed to delivering excellent customer service. At NN, we provide an inclusive and open working environment that allows our employees to thrive. We also have a responsibility to contribute to society as a whole. This includes playing our role in fighting climate change and NN has the ambition to achieve net-zero greenhouse gas emissions across the entire business by 2050. The biggest impact we can make is by investing our assets responsibly. And last year, we announced interim targets for 2025 and 2030 to reduce emissions of the investment portfolio. We also see an increasing demand from customers for sustainable solutions, such as mortgages originated under our new label that encourage the purchase or renovation of an energy-efficient home. We believe that if we take good care of customers, employees and society, this allows us to sustainably grow NN and deliver solid long-term returns for our shareholders. And that brings me to the financial results. The highlights of the second half of 2021 are shown on Slide 4. NN Group has reported a solid set of results for the second half of 2021 with strong commercial and financial performance across the group. Operating capital generation grew significantly to EUR 804 million in the second half of the year, and all business segments contributed to this increase. The Non-life business, in particular, posted strong underwriting results. Another driver was the higher investment return as a result of our changes in the asset portfolio and higher equity and real estate valuations. We saw continuing strong commercial momentum with sales up 15%, excluding currency effects, compared with the second half of 2020 and value of new business up 29%. Events, such as the pandemic over the last 2 years and the floods in July last year, are creating a higher awareness of risk and vulnerability leading to an increased demand for protection products and contributing to the higher sales in Europe and Japan. Delfin will talk about the financial results in more detail later in the presentation. The strong capital generation supports our robust balance sheet and capital position. The solvency ratio was 213% and the holding company cash capital was EUR 2 billion at the end of 2021. In the coming months, we expect to receive the proceeds from the sale of our asset manager. And we will also pay the consideration for the acquisition of the MetLife businesses in Poland and Greece as well as redeeming the maturing senior debt. This allows us to deliver substantial capital returns to shareholders. In line with our dividend policy that aims for a progressive dividend per share, we are announcing today a proposed final dividend per share of EUR 1.56, bringing the full year dividend per share to EUR 2.49. This is an increase of 7% on the 2020 dividend per share. We are also announcing a total share buyback of EUR 1 billion. I will talk more about this later on a later slide. Let's now move to Slide 5. Our strategy is based on organic growth and all business units capitalized on the growth drivers in 2021. Netherlands Life is capturing growth opportunities in the Dutch pension market with a strong increase in defined contribution assets. We also expect the Dutch pension reforms to accelerate the pension buyout market. An example of this is the Henkel pension fund buyout in July last year, bringing EUR 125 million of assets. As the #1 player in the Dutch Non-life market, we are in a unique position to benefit from our scale in terms of efficiency and underwriting. The acquisition of VIVAT Non-Life has brought additional scale and synergy benefits. The integration of VIVAT is almost complete and the envisioned EUR 40 million of cost savings have been realized 1 year ahead of plan. When integrating activities, you normally expect some loss of business as overlapping products and services are rationalized. In the case of VIVAT, we have actually seen a positive development in the portfolio and margins. NN's international activities in Europe and Japan are expected to deliver strong growth on the back of focus on protection products, a diversified distribution footprint and digital capabilities. This is driving higher sales across the region in Europe. Sales in Japan increased significantly, reflecting a strong market recovery from low sales in 2020 and some normalization is expected this year. Value of new business in the international units grew strongly over the year. The Dutch housing market is experiencing strong growth with house prices rising steeply, and there is fierce competition among mortgage providers. Despite this, NN Bank originated a record volume of high-quality mortgage at good margins for its own balance sheet and for the investment portfolio of the group insurance companies. Finally, the asset manager saw a healthy inflow of third-party mandates in 2021, which is a testament to the professionalism of our NN IP colleagues during the turbulent period after the announcement of the strategic review and subsequent divestments to Goldman Sachs. Our strong results and robust capital position allow us to deliver substantial capital returns to shareholders as set out on Slide 6. We have reported operating capital generation, or OCG, for 2021 of almost EUR 1.6 billion, which includes EUR 135 million relating to the asset management business that will be sold in the coming months. We target OCG in 2023 of EUR 1.5 billion. Since we set this target, we have announced the sale of the asset management business as well as the acquisition of MetLife Poland and Greece and Heinenoord in the Netherlands. Following completion of all these transactions, we expect to have excess capital. At the same time, we have kept our capital generation target of EUR 1.5 billion given the contribution from the acquired businesses as well as the strong performance across the group, supported by organic growth drivers. And looking further ahead, these drivers will give us confidence that we will realize a mid-single-digit annual growth of operating capital generation in the long term. Our approach to capital deployment is clear. We are committed to delivering on our dividend policy of a progressive dividend per share and an annual share buyback of at least EUR 250 million. Any additional excess capital will be returned to shareholders over time, unless used for value-creating opportunities. Today, we are announcing a proposed final dividend of EUR 1.56, which will be tabled at the AGM on the 19th of May for shareholders to approve. This represents a 7% increase in the total dividend per share for 2021 compared to 2020. We assess excess capital based on the 3 pillars of our capital management policy: so solvency, leverage and cash capital. We have a robust solvency ratio and a comfortable leverage position. And we expect our cash capital at the holding, following the completion of the portfolio and transactions in the coming months, to exceed our cash capital target range. We are, therefore, also announcing a total share buyback of EUR 1 billion, of which EUR 250 million program is expected to commence on the first of March and an additional program of EUR 750 million will start once the sale of NN IP has been completed. And with that, I will pass you over to Delfin.

Thank you, David, and good morning, everyone. Let me start as usual with the movement in NN Group's solvency ratio. Our solvency ratio remained strong at 213% at the end of 2021 compared with 209% at the end of June. Let me take you through the main items impacting the ratio in the second half of the year. Firstly, operating capital generation added 9 percentage points. I will talk more about the drivers of operating capital generation by segment later. The impact from markets was positive, reflecting positive real estate revaluation and changes in interest rates and credit spreads, adding 6 percentage points to the ratio. There are several items that lowered the ratio this period. The first one is the category Other, which includes the impact of model and assumption changes. The second one is M&A as a result of the acquisition of Dutch broker and service provider, Heinenoord, and a small positive impact from the sale of the Bulgarian business. And lastly, the capital flows to shareholders in the form of the proposed 2021 final dividend. Note that the share buyback of EUR 1 billion that has been announced today will be deducted in the first half of 2022. Let's now turn to Slide 9, which shows the solvency ratio development on a full year basis. The solvency ratio was 210% at the start of 2021. Looking at the movements during the year, operating capital generation was strong in 2021, contributing 18 percentage points to the ratio. In addition, we experienced favorable market impacts, adding 14 percentage points to the ratio mainly driven by the positive impact of a spread tightening and real estate revaluations and, to a lesser extent, also changes in interest rates. These are partially offset by the category Other, which reduced the ratio by 11 percentage points. This includes changes to our asset portfolio and model and assumption changes. We actively manage our investments. In accordance with our strategy, we reduced our exposure to government bonds and invested in illiquid asset classes such as mortgages, loans and real estate. We took a more opportunistic approach with regards to, for example, equity where we reduced our exposure at the end of 2021. In addition, as expected, the ratio was lowered by the impact of the UFR reduction from 375% to 360% at the beginning of 2021 and the M&A transactions, as previously mentioned. Capital flows to shareholders in 2021 amounted to a total of EUR 1 billion, which reduced the ratio by 10 percentage points. Let's now discuss the operating capital generation in more detail on Slide 10. Operating capital generation in the second half of 2021 was EUR 804 million compared with EUR 450 million in the same period of 2020 with almost all segments contributing to the higher result. One of the drivers of this increase was the positive impact of changes in the asset portfolio and higher equity and real estate valuations as well as the lower net negative impact of the UFR drag and risk margin release as a result of higher interest rates and a lower UFR. This was partially offset by the negative impact of lower credit spreads. Note that these drivers mainly come through in the capital generation of Netherlands Life. The Non-life underwriting results in both P&C and Disability & Accident were higher despite the impact from the July floods in the Netherlands and Belgium. We also saw some P&C frequency benefits as a result of COVID-19. The higher contribution from banking reflects capital generation calculated under the new methodology that was introduced in 2021. As you probably remember, the former methodology used was based on dividends remitted to the holding, which was nil in 2020. On a comparable basis, the capital generation of the bank in the second half of 2020 would have been EUR 37 million. These positive movements were partly offset by lower capital generation of the segment Other mainly reflecting lower results at the reinsurance business. A breakdown of operating capital generation by source can be found in the Appendix to this presentation. The next slide shows the movement in the cash capital position of the holding. This slide shows 2 graphs. The upper chart presents the movement in cash capital in the second half of 2021 and the lower chart, the full year movement. Let me start with the second half year. Holding company cash capital was EUR 2 billion at the end of December 2021 compared with EUR 1.5 billion at the end of June. Total remittances received from subsidiary amounted to EUR 856 million, bringing free cash flow to EUR 693 million. As usual, details of the remittances upstream by each segment can be found in the Appendix of this presentation. The main cash outflow in the second half of the year was the payment of the 2021 interim dividend in September of EUR 160 million as well as the shares and repurchase under the buyback program of EUR 384 million. We also paid EUR 358 million for acquisitions mainly related to Heinenoord. In November last year, we issued EUR 600 million of senior notes, which you can see as an increase in debt and loans in the chart. Please note that the proceeds of this debt issue will be used to repay the existing senior notes that mature in March of this year. So this increase is temporary. Looking now at the full year chart, we received over EUR 1.8 billion of remittances from subsidiaries, resulting in just under EUR 1.5 billion of free cash flow in 2021, and we returned almost EUR 1 billion to shareholders. Moving on to the next slide, I will take you through the IFRS financial results of the group. Starting on the left, NN Group's operating result decreased to EUR 917 million from EUR 963 million in the second half of 2020 due to a lower technical margin at Netherlands Life. Higher claims in the reinsurance business, higher operating expenses at banking and the approximately EUR 50 million negative impact from the floods in July. This was partly compensated by higher underwriting results in Netherlands Non-life and higher fees at asset management. On a full year basis, the operating result increased to just over EUR 2 billion as most of the segments reported higher results. On the right-hand side, you can see a large increase in the net result for both the second half and full year. This increase included the realization of large capital gains on the sale of public entities and government bonds as well as positive revaluations on real estate and private equity. I will now take you through the operating performance of the individual segments on Slide 13. Starting as usual with Netherlands Life, which reported an operating result of EUR 466 million versus EUR 500 million in the second half of 2020. This reflects a lower technical margin as the second half of 2020 benefited from positive nonrecurring items. This was partly compensated by a higher investment margin, which included EUR 54 million of private equity and special dividends. The second half of 2021 also benefited from higher fees and premium-based revenues. The operating result of Netherlands Non-life increased to EUR 125 million. This reflects higher underwriting results in Property & Casualty, in particular, in the Motor and Miscellaneous portfolios, which included frequency benefits as a result of COVID-19. On the other hand, the Fire portfolio was impacted by the July floods in the Netherlands and Belgium. The result for D&A also improved despite a negative impact from COVID in the individual disability portfolio. Investment income was also higher driven by private equity dividends and changes in the asset portfolio. The combined ratio was 95.1% versus 95.7% in the second half of 2020. Insurance Europe's operating result was broadly stable at EUR 154 million in the second half of 2021. This reflects higher life and pension fees across the region, offset by higher administrative expenses reflecting the investment in various growth initiatives as well as a lower technical margin and higher DAC amortization and trail commissions. The operating result of Japan Life was EUR 107 million, which is an increase of 9%, excluding currency effects. We still see low surrenders, reflecting the increased persistency in the portfolio, and this led to lower DAC amortization and trail commissions. Asset management's operating result increased to EUR 91 million, reflecting fees on higher average assets under management and a more favorable asset mix. This was partly offset by higher expenses. The operating result of banking decreased to EUR 55 million in the second half of 2021 due to higher project costs as well as expenses supporting an increase in mortgage origination. Finally, the operating result of the segment Other was minus EUR 81 million, reflecting the lower operating result of the reinsurance business as well as lower holding results. And with that, I will now pass you back to David for the wrap-up.

Yes. Thank you, Delfin. Looking back at 2021, I think we can conclude that we achieved many things in the past year. First and foremost, amidst the ongoing challenges of the pandemic, all our colleagues continue to show immense dedication to providing excellent service to our customers while still working from home. We have made additional commitments to play our role in fighting climate change by announcing interim targets to reduce emissions of our investment portfolio and of our own operations. We have also joined the net-zero insurance alliance to support the transition of our underwriting portfolio to net zero by 2050. With the acquisitions of MetLife in Poland and Greece and Heinenoord in the Netherlands, we seized the opportunity to acquire attractive businesses in growth markets. And as a result of critically assessing our portfolio of businesses, we decided to divest the activities in Bulgaria and sell the asset management business to Goldman Sachs. We believe that these businesses will thrive and grow under the new ownership. In terms of financial results, NN Group is reporting an operating result of EUR 2 billion for 2021 and an operating capital generation of almost EUR 1.6 billion as we build on the organic growth drivers that support the strategy of the group. One of the pillars of our strategy is to maintain a robust balance sheet and capital position, and this allows us to deliver on our commitment of attractive returns to our shareholders. Today, we are announcing a proposed dividend per share of EUR 2.49, up 7% on 2020, and a total share buyback of EUR 1 billion. Before we open up the call for your questions, let me remind you that this is the last set of results that Delfin is presenting as our CFO and is therefore also your last opportunity to ask him lots of questions, including the ones that you always wanted to ask but never did. And with that, I'll open -- I'll ask the operator to open the call for Q&A.

[Operator Instructions] The first question is from Mr. Andrew Baker, Citi.

So the first one is just on the OCG of EUR 1.6 billion for the year. Obviously, there's some ins and outs of COVID market M&A. So I'd just be interested in what you see as the normalized base for full year '21 as we think about sort of 2022 and 2023. And then the second one is on the EUR 1 billion buyback. So obviously, there's 2 components of those, the EUR 250 million recurring buyback and then the EUR 750 million following the NN IP disposal. So I'm just wondering, if I look at your sort of cash and capital positions on an ongoing basis, both of them are very healthy. So I'm just curious why you didn't explicitly increase the recurring buyback portion going forward. So those are the two questions.

Okay. Thank you, Andrew. Let me start with the OCG on 2021. Yes. So indeed, so we had a very strong business performance across all the business segments. There were -- the OCG, of course, was very much supported by, let's say, new business contribution from the international business, underwriting results for Non-life, growth of mortgages, successful investments that we have done. So we were pleased to see the outcome of the OCG. Please keep in mind that if you talk about '21, that part of the EUR 135 million of NN IP will not be repeated in 2021 -- or sorry, in 2022 after closing of the transaction, which we expect in the first half of the year. And also, P&C was extra favorable, supported by COVID and still a situation where economic activity due to lockdowns was a bit lower. And also, to a lesser extent, I think bank benefited from a significant increase in house prices in the Dutch market, which we don't expect to be repeated. But indeed, overall, I think we're well on track to get to the EUR 1.5 billion also with all these factors in there. And there's clearly -- in the current business environment, there's clearly a positive momentum. I mean there will always be some volatility, but yes, you can count on us to continue to drive the results of OCG. A couple of words on the share buyback. So the share buyback and the dividend that we have announced is fully in line with our capital return policy, which is around a progressive dividend, minimum EUR 250 million share buyback and any additional capital also to return over time to shareholders, unless we see value-creating opportunities. Now we had by any account a strong year in 2021, which is also reflected in our dividend and share buyback. So following the M&A that we did in 2021, we expect at closing of the transaction around EUR 1 billion of extra proceeds coming out of the M&A while obviously keeping our OCG targets. And with this share buyback, we also returned a significant part of these proceeds, of course, subject to closing of the transaction. So from that point of view, this is all fully in line with -- the policy that we have and that's also how we will judge it for the next years. Delfin, anything to add?

Yes. Maybe on your question of why EUR 250 million is recurring and the rest is related to NN IP, we don't see it like this. We have decided on a total share buyback of EUR 1 billion. So we're not making a distinction of one being recurring, not the rest. As you know, we have, as proven in 2021, a strong operating capital generation. We continue believing on the midterm -- mid-single-digit growth of OCG over time, and that provides capacity for an increased regular share buyback. So don't make that distinction between one and the other. It's just one amount of share buyback of EUR 1 billion.

The next question is from Mr. Farooq Hanif, JPMorgan.

Thanks, Delfin, for all your help on communication over the years. So I have got a few questions for you. Just going back on OCG, you mentioned on the investment return some positives and negatives. So rerisking, but then equity revaluation, we look at revaluations and low credit spreads. Could you just talk about how sustainable that number is? Because -- yes, what proportion of that increase was basically due to rerisking and what proportion was basically kind of the market movement, I guess, is the question. My second question is, can you talk a little bit more about the Heinenoord transaction and the ABN transaction, kind of what are these bringing to your -- to the plate in the Netherlands?

Yes. Thank you, Farooq. I might slightly disappoint you now because I will cover the Heinenoord and the ABN AMRO transaction, and I'll ask Bernhard to talk about the OCG and the investment returns, but I'm sure we'll hear more of Delfin on this call. Heinenoord and the ABN AMRO transaction. Yes. So both clearly strengthened our position. I think we are the market leader in non-life, but we have also seen that service providers play an important role in the Dutch market around non-life and actually become increasingly playing an important role. And in order to avoid that we would be, as we call it, fully be -- pushed back into the value chain, we felt it was important also to have a significant stake in that part of the value chain. So that was a strategic consideration, there's also simple financial consideration. It's not a coincidence that the [ service ] providing market is consolidating and that private equity plays a big role in that because you can make attractive returns. So in our view, it was attractive both strategically and to secure our leading position in the non-life market as purely from a financial point of view. ABN AMRO transaction. Yes. So essentially, what happened is, ABN AMRO, we have a joint venture on the Non-life side and on the Life side, 51% for NN and 49% ABN AMRO. So what we now did is we acquired the remaining part of the life joint venture. Now this is a book that is like most life books in the Netherlands mostly in runoff. And it is very important in a runoff business, as I'm sure you know, to have scale to be able to combine portfolios so that you can address also the fixed cost that tend to be in these portfolios. On the -- and in Life side, we've been variabilizing our fixed costs. We have a lot of scale. We have good capabilities there. In the past, we integrated the RVS, we've integrated the Delta Lloyd books. And now we will be integrating the ABN AMRO book and therefore, creating more scale on the Life side, being able to variabilize the costs, but also avoid that the ABN AMRO joint venture, over time, the life company itself becomes a subscale business. So from that point of view, I think it's a good transaction. I'm sure you've also seen that we were able to do this on attractive terms. And good to note that we combined it with an extension of 5 years for the Non-life corporation. Now the joint venture on the Non-life side is running well. There's a lot of new business coming in. So we continue to also cooperate well with ABN AMRO on the Non-life side. So all in all, it strengthens our position in the Non-life business through Heinenoord, it supports the closed book business operation that we have on the NN Life side. And we'll continue to further grow on the P&C side with ABN AMRO because that's a corporation we're very pleased with. Then on OCG, Bernhard?

Yes. Farooq, on investment return, in the last year, we mainly achieved our ambition to add additional EUR 200 million of OCG by our rerisking program that we announced in 2020. So in the investment return results for 2021, you see this, but you also see some positive impact from revaluation of our equity exposure and also our real estate exposure that also contributed positively. And now how sustainable is this or how to make sense of this going forward, well, there is, of course, a typical market volatility to take into account. We also are optimizing our portfolio. Delfin already pointed out, sold some equity end of last year. So there will be some changes in the portfolio mix going forward. But in general, we are continuing to shift to higher-yielding assets and investing in mortgages, loans, real estate also in the years to come. So that is also to take into account for an outlook of the OCG contribution from our investments.

Okay. Just returning on that investment return question. So I mean you've got rerisking on the one hand and some of the market volatility, but on the other hand, you've got the actual book on which you're earning the spread going forward. I mean is that really -- with rerisking and the spread, would that number still to grow? Do you expect that number to grow -- with that number to grow?

Yes. So looking forward, as we are shifting to higher-yielding assets and the overall excess return or the spread we earn on our market value of the year, of the assets has increased and we're also expecting to increase it further.

The next question is from Mr. Steven Haywood, HSBC.

I wanted to say thank you very much to Delfin for helping me since 2014, although you've been in the company even longer than that. But obviously, that's when we first met. A few questions from me. On the interest rate sensitivities for Solvency II, I see that the rising interest rates has flipped. So it's now negative Solvency II sensitivity for rising interest rates. What happened in the second half? And can you provide an explanation as to why rising interest rate is negative for your Solvency II ratio now? And then secondly from me, specifically on Non-life business, the OCG run rate netting out floods and COVID impact because you had obviously positive benefits and negative benefits depending on which line of business. Were there any other notable items in 2021 that elevated OCG above EUR 300 million? Did you see any SCR releases or benefits coming through on the own funds? To be honest, it would be great if we could get more detail on the OCG, split each segment OCG by own funds development and SCR development for the full year, that will be very, very helpful. But just specifically on the Non-life for today, I would like a greater detail if you can.

Okay. Thank you, Steven. Let's start with the Non-life question. Let me just try to give you an overall picture of the Non-life business. Delfin can then add to give a bit more detail on OCG for Non-life, and then Bernhard will cover the interest rate sensitivity question and how the sign has flipped there. So first of all, on Non-life. So clearly, Non-life had a very good year. Second half, we had a 91 -- a 95.1% combined ratio; for the full year, 93.5%. So that's clearly a very strong year. And indeed, this is despite the floods that we've seen and some of the long COVID cases in the D&A business. I was particularly pleased also to see that the Net Promoter Scores, especially in the largest portfolios around SME, have been improving and VIVAT contributed. The policy in data migration has been done a year ahead of schedule, the expense savings as well. So we've seen a positive portfolio development, therefore, on the Non-life side. In terms of Other items, COVID is broadly -- we would say, is broadly neutral. The impact -- clearly, there is a negative impact on the D&A side. We've seen what we call long COVID cases. So -- and this was especially cases that where people got in 2020 that turned out to be sick over a longer period, some will now also move from the sickness portfolio to the disability portfolio. So there is that effect. Of course, in the second half of this year, we've seen the different impact. We saw elevated increases of people getting sick but also very elevated outflow of cases. So a different dynamic probably also related to a different variants of COVID. The P&C side, of course, was a bit the opposite where results were supported. We didn't have a lot of large fires and also a bit of a lower intensity in the Dutch economy. So going forward, I think if the economy fully opens up, that might put some upward pressure on P&C. We also see that there's a bit of the P&C, especially on the motor side, on the retail side is the market is becoming a bit softer there. The COVID impact, especially for the longer cases, will still be there. At the same time, we have been increasing premiums. We have -- we see efficiencies on the expense side. We're improving our data and underwriting. Prevention is improving. So we keep -- as an outlook for the Non-life business, we're keeping a guidance between 94% and 96% of our combined ratio. Delfin, would you like to add some more details on the OCG?

Yes. So thank you very much, Steven, for your kind words. So on the Non-life OCG, in 2021, I mean really there is no special non-recurrent item to mention. It is just that the results, particularly for Property & Casualty, has been very good. And on your question on the SCR releases, during the second half, the effect of the increase of SCR due to new business and the runoff of the existing business has been sort of neutral. So overall, we have seen in the second half an increase of around EUR 200 million of the own funds and the SCR is staying more or less stable at the same level, slightly up.

Yes. Steven, on the interest rate sensitivity, yes, well spotted, the sign flipped. For the Solvency II sensitivity, what is the background? In the second half, we refined our partial internal model and the approach. For interest rate risk, we now consider the interest rate sensitivity of the risk margin in our solvency capital requirements. And this change resulted in a one-off increase in solvency capital requirements. And in the Solvency II metrics, this now leads to a lower sensitivity of the solvency capital requirement. So the signs of own funds and SCR dependency on interest rates has not changed. Now if interest rates go down, own funds also will still go up and SCR goes up and vice versa. So the direction of the individual drivers has not changed, but simply, SCR changes are now less sensitive to interest rate changes and therefore, the sign flipped. But this has no impact on our interest rate risk policy or ALM approach. So we keep matching our cash flows closely on an economic basis. And on an economic basis, we are also still slightly short positioned as we also see more interest rates rising. So there is no change in any of our ALM approaches.

The next question is from Ms. Fulin Liang, Morgan Stanley.

And I got two questions. Actually, one of them already been asked, but I just ask a follow-up question on the interest rate sensitivity. Because of the rising interest -- I understand that you're not changing the ALM approach, but because of the rising interest rates, you're own fund will reduce and now the ratio also kind of reversed. Would you consider to reduce your interest rate hedge and just opportunistically just taking advantage of the rising interest rates? Or are we going to continue to see this negative link to interest rates? I guess that's the first question. And the second one is, so you have done a lot of work to optimize your own -- your -- kind of your business. You -- through the ABN AMRO kind of restructure. Are there any other internal business optimization we should be expecting to see?

Yes. Thank you, Fulin, and let me start with the last question, and then Bernhard can follow up on your follow-up question on interest rate sensitivity. No. I mean we have -- we continue to assess our footprint. And I think we've shown that we're very rational and disciplined around judging whether we are the right owner of assets and business units or not. But the fact that we had a joint venture in a runoff situation was a special case and also a special opportunity. But we'll continue to monitor our portfolio not just in last year, but also going forward. Bernhard?

Yes. Fulin, on the interest rate sensitivity, well, it is still very low. If you see 50 basis points parallel shift of the yield curve up and down, it's a few percentage points that we are sensitive in our solvency ratio, that means there is also room for technical positioning, which we do in our optimization of our strategic asset allocation or portfolio adjustments. And therefore, this is not really hindering us or limiting us in the way, also able to manage interest rates actively also in this environment.

The next question is from Mr. Farquhar Murray, Autonomous.

Thanks, Delfin, of course, to you for over the years, you've been very, very helpful indeed. Two questions, if I may. Firstly, on the buyback of EUR 1 billion, you seemed to be saying, don't read too much into the split of the EUR 250 million versus the EUR 750 million. Think a bit more as a total. Is the split then mainly really a reflection of cash flow timings? Or is the EUR 250 million indeed just the minimum and the EUR 750 is the remainder? My broader question is really whether we should think of this as all and done with regards to redeployment of capital from NN IP and, to a degree, retaining some of it or whether we should really see where we are in a year's time. And then secondly, just a point of detail on the cash position on Slide 11. Could you just elaborate what the EUR 150 million figure cluster Other, if -- or what exactly is coming through that line is just a bit larger than I expected?

Yes. Thank you, Farquhar. Delfin?

Yes. Thank you very much, Farquhar. Indeed, the EUR 1 billion is you have to consider as a total. Yes, we basically said EUR 250 million, we start now and the additional EUR 750 million, after the completion of NN IP because obviously -- I mean, first, we are very confident that the transaction is going to close as expected within the next month. But it makes a big difference as NN IP contributes with 17 percentage points to solvency, and it is close to EUR 1.7 billion of cash. So that means that it is a big difference. So it just makes sense, started the transaction once they -- this has to be completed. In any event, both share buybacks are expected to complete, if you want, by March 2023. So you can see them as one share buyback program, but part of it is starting a bit later. In terms of the other figure of EUR 150 million, this basically includes the cost of the debt as well as the cost of the holding and there also some smaller items, particularly tax adjustments.

The next question is from Mr. Michael Huttner, Berenberg.

Fantastic. I have two questions. One is -- there was basically more, please. And first one is one that's a bit more on the dividend. So it's a long way to you, but consensus was EUR 1.57, you've got EUR 1.56. It would cost you nothing to round it to euros or whatever -- not euros, but what is it? EUR 2.6 or something, EUR 2.5. Is there anything to read here? Because what I'm sensing from the call, and this is why I asked the question in a kind of funny way, is that although the numbers are truly exceptional, they're kind of holding us back and say, no, no, don't worry, no, this is kind of -- no, this benefit will go away or don't worry to much, NN IP is gone. And I just wondered, what are you seeing that we're not seeing from these numbers that kind of pushes towards caution? And that's why I asked then the dividend because truly, the dividend is closer. And the other question I had is a little bit more on the interest rates and maybe you can touch on inflation in the same way. So you've talked about interest rates and the solvency. And truly, your solvency is not economic as -- we have to look at something else. And I just wondered, if we think in terms of economic, say, interest rates do go up by 50 bps, how much do your earnings go up?

Yes. Michael, thank you for your question. I think why not more dividend or -- yes, I mean, obviously, consensus is important, but we are managing, at the end of the day, the company in line with our own policies. And we launched in the beginning of 2020 a new capital return policy around progressive dividend. The dividend growth with 7%, I think that is a good number that fits well with the guidance that we have given on progressive dividend, especially in the context of a good year. And you're right, it is a very good year that we have. They're very good results. And I think that's why we also said, hey, we're on track to get to the EUR 1.5 billion with all the changes. But in current business environment, there is a positive momentum. So you can count on us to continue to -- we see opportunities to continue to drive our results further up. On interest rates and inflation, Bernhard?

Yes. Michael, you will be, of course, happy to hear that inflation risk is not really a concern for us. And in fact, yes, I mean, in fact, everyone in the financial industry is welcoming higher interest rates with a healthy level of inflation. And also, our Solvency II sensitivity is very limited. Now if interest rates rise, what is the OCG impact? We have disclosed last year in the investor deep dive on interest rates the impact based on end of 2020. If you look at this number, well, it will be a bit lower for 50 basis points parallel shift mainly because we are already at a higher interest level. And you can also look at 2021 at our disclosed numbers for UFR drag and risk margin changes that gives you a flavor of higher interest rate impact coming from this. But it's also important to see this always in the context of the overall financial market change impact. So it's not only about interest rate, but also spreads and, of course, the other risky assets moving where we already had in the call an outlook and, of course, with the respective volatility that have to be taken into account.

Yes. Thank you, Bernhard. And I think, Michael, one more thing, I think you said something along the why are you holding back? Personally, I think if you're doing 7%, and we do a total buyback of EUR 1 billion, I think that also shows that we have a lot of confidence in the results of the company.

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

Delfin, all the best for your future endeavors also from my side. My question is -- sorry, again, about capital return. I think it's still not entirely clear whether this EUR 750 million is a one and done kind of story. I think you have said quite clearly that you will return excess capital over time, which I think suggests it's not a one and done. And if I look at my holdco cash bridge towards 2023 year-end, even if you would do another EUR 1 billion of buyback next year, I think you still end up around EUR 2 billion of holdco cash, assuming you're not doing deals. So can you just be a little bit more explicit that this is not a one and done kind of buyback? And then in relation to the buyback, I think the 7% dividend growth you're showing today is basically a reflection of your mid-single-digit free cash flow growth and then the buyback of EUR 250 million adds another 2 percentage points of dividend growth. Consensus is only modeling for 7% dividend growth going forward. But today, you're announcing EUR 1 billion of buybacks. I would assume that your EPS trajectory should accelerate on the back of this bigger buyback to the tune of roughly 6 percentage points. Can you confirm that? And then secondly, the unit-linked misselling news flow we have last week the press release. Can you just give us your thoughts on how that could implicate the Dutch Life insurance companies and NN in particular? I mean, to me, it seems like it's sort of a reiteration of what the European Court of Justice has sort of said in 2015 that yes, this going beyond the insurance regulatory disclosure requirements, whether you should go beyond that at the time you sold those policies should be weighed in the court judgments basically that needs to be a consideration. But that was on the table I think already. So didn't courts already take that into account in their past verdicts? Or do you see a risk that verdicts will change in your negative, basically?

Yes. Thank you, Robin. And let me start on the unit linked and then Delfin can cover the question around share buybacks and DPS in detail. So for maybe the people that have been a bit less following this case, so the question on the table was, was the right information provided to customers at the time of the sale of these policies, which was mostly in the '90s? So the Dutch Supreme Court now ruled, to your point, indeed, on -- in line with the European ruling several years ago, I think in 2015. And this view that was now expressed aligns very well with our view. So therefore, we haven't changed our position on this matter. What will now happen is that the case from the Supreme Court is referred back to the Dutch Court of Appeal where the legal case will continue. So this was again only an intermediary -- intermediate step. But it hasn't changed our position or our disclosures for that matter. Delfin?

Yes. Thank you very much, Robin. If with this EUR 1 billion, if we are done with the distribution of excess capital to shareholders, of course, the answer is absolutely not. We have seen -- and I think the numbers that we have disclosed today is testament of the capacity of NN Group of generating on a sustainable basis, growing levels of OCG. In 2021, we have EUR 1.6 billion. We have confirmed again our views that OCG to grow mid single digit over time. Free cash flow was EUR 1.5 billion coming from more than EUR 1.8 billion of remittances. And as David has explained, there is some positive momentum that we are seeing. In terms of markets, with the increase in interest rates, with the spreads, with the asset allocation that we have done, there is also some positive momentum there. So that means that just the organic capital generation will be sufficient to keep maintaining a healthy share buyback program going forward. And then you're right, when looking at the level of being it solvency with 213%, being it our leverage that adjusted by the EUR 600 million that we have refined -- refinance is around 21%. And looking at the evolution and expected evolution of cash capital at holding, clearly, there is more room to provide additional share buybacks in 2022 and onwards.

And on the DPS trajectory considering higher buybacks?

Yes. On that one, absolutely, you are also right. Our progressive dividend policy is aligned with the midterm, long-term prospect of growth of OCG. And that we said is mid-single digit. But absolutely, as we buy back shares, the capacity to grow the dividend per share adds a couple of percentage points to what would be the evolution of the dividend in absolute terms.

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

Yes. And thank you, Delfin, for your very good communication over the past few years. Now a couple of questions on my side. And the first one is on the -- on this EUR 1.5 billion OCG target. When are you going to update that? I'm asking because if you kind of look at the ex NN IP level in H2, you get to EUR 740 million. And obviously, you need to add MetLife Poland and Greece on the top. You said that the COVID impact is broadly neutral. And obviously, you have also the impact of kind of higher rates so far this year, which is probably pushing it north of EUR 1.5 billion. So I was trying to understand why we lead here and are you just cautious into 2022 because of the kind of P&C normalizing faster than the D&A? Or is there something else? Or maybe, Delfin, you just give some room for -- to admit to provide a new guidance later. The second one will be on the remittances from the Netherlands, Netherlands Life is I think at 220% on Solvency II ratio. And obviously, here, we've seen some good support from lower UFR drag. So can we expect remittances to be going up a bit into 2022? Or do you want to keep the same level of 2021? And then maybe the last one will be kind of, yes, on regulatory risk linked to the mortgages, do you have any discussion whatsoever with DNB on a potential capital charge on mortgages? I'm asking because they put an add-on on the banks. They are a bit cautious on the mortgage market. And is there a potential risk to get add-ons on your Solvency II models there?

Yes. Thank you very much, Benoit. Well, first, quickly on the targets. Well, we first need to make it. I mean the -- obviously, we had the EUR 1.6 billion. But indeed, if you correct for part of the NN IP and some of the [ head ], we wouldn't end at the EUR 1.5 billion. So let's first make that target before we start talking about a new one. On mortgages, I can also cover that quickly. No, there is no discussion with DNB on extra charges related to Dutch mortgages. Delfin, on the remittances?

Yes. So thanks, Benoit, also for your kind words. On remittances, indeed, the momentum in NN Life is very positive because of the change in interest rates and the lower impact of the net of the UFR drag and the risk margin release, that has potential increase. Also, via the acquisition of the ABN AMRO Life, that increased the dividend capacity of NN Life of around EUR 30 million. One said that a link in also with the comment that David has made, we have always been very cautious, and it's not because of the incoming CFO, as you mentioned. But we've always been a bit prudent on the way of moving forward. Netherlands Life is already providing EUR 1.40 billion of dividends plus the coupon on the subordinated debt. And this is actually a very healthy, a very stable and predictable dividend. We always have said that we like to have this predictability and move gradually and orderly from that respect. But indeed, with a stronger solvency at 219% and with some momentum on the OCG at NN Life, the dividend capacity increases, but I would not put in your model an increase of dividends yet.

And the next question is from Mr. Nasib Ahmed.

Most of my questions have already been asked, so just two quick follow-ups. Just following up from the last answer on free cash flow generation. If I look at it as a proportion of OCG for full year '21, I think it's at 90%. And excluding asset management, it's pretty much in line with OCG. So I agree within that Netherlands Life that it's more than its OCG [ with other units from that side ]. So just looking at payout ratio going forward as a percentage of OCG, is that kind of the level that you would expect sort? Or is it sort of in line with your guidance on -- in and around OCG so we should expect? And then secondly, just on the solvency ratio given the questions on the interest rate sensitivity, if interest rates are rising, you're coming -- going down from the 213%, then you've got about 10 points of the share bonds coming off, I agree there's positives from the NN IP sale of EUR 17.2 billion. And -- but offsetting that is probably the UFR runoff. So just in terms of comfort level, I know it's a really strong level but what kind of comfort level are you happy with in terms of supporting the share buyback dividend and the UFR runoff?

Yes. Delfin?

Yes. So on Netherlands Life, we have always indicated that dividend capacity is a combination of what is your level of solvency and what is the expected additional capital that you do expect. And as mentioned in -- to the answer to the question before, Netherlands Life is not only having a good level of solvency, but also there are some good momentum in terms of investment return because of the asset reallocation, but also because of the runoff of the portfolio and the fact that the higher interest rates has a very significant positive impact on the UFR drag. On the solvency -- and the guidance has always been that over time the free cash flow to be in the range of the OCG. In terms of the Solvency II sensitivity to interest rates, as Bernhard has indicated, it is quite low. With the changes of 50 basis points, there is only a few percentage points that impact the Solvency with the corresponding contrary impact generally on the OCG generation going forward. So in that sense, I see no concern whatsoever in terms of the interest rate sensitivity for the continuation of the capital policy that we have indicated, including the -- included the share buyback. Also other sensitivities for other market shocks are well within our tolerance levels.

This was the last question.

Okay. Well, then let me close off. So first of all, thank for your all your questions. Before we close the call, let me wrap up by saying that 2021 was an exciting year, and we made a lot of progress in achieving our ambition to create value for all our stakeholders. And also thank you very much for sharing your appreciation for Delfin, which we all internally within very much share and have a good day.