NN Group NV
AEX:NN
Earnings Call Analysis
Q2-2023 Analysis
NN Group NV
The company reported a solvency ratio of 201%, which indicates a solid financial foundation that can sustain future challenges and potential investments. This strong solvency ratio, coupled with a holding cash capital of €1.9 billion, underscores the organization's ability to withstand volatility and to take advantage of opportunities as they arise.
Commitment to shareholder returns remains unwavering with a progressive dividend policy and a minimum share buyback program set at €250 million annually. This approach is supported by an increased interim dividend for 2023, up by 12% to €1.12 per share, reflecting the company's robust earnings and cash flow.
With operating capital generation almost hitting €1 billion, which is an impressive 15% increase over the previous year, the company showcases a potent mix of underwriting expertise and fee growth across its diverse business units. Even amidst various macroeconomic challenges, the business in Europe exhibits marked growth, with a 9% increase in new sales year-on-year. NN Group indicates that they anticipate achieving their 2025 target of €1 billion in operating capital generation ahead of schedule by as much as two years, despite recognizing the potential normalization of previously favorable conditions.
The investment portfolio has remained robust despite adverse market conditions, underpinned by diversified segments and strong occupancy rates in real estate that exceed 95%. The company expects the pace of negative real estate revaluations to decelerate in the second half of the year, with a diversified exposure and ability to adjust rent for inflation largely mitigating risks.
The company's cash flow generation remains strong with €832 million recorded in H1. With plans to achieve mid-single-digit cash flow growth based on the adjusted 2021 level by the year 2025, the current trajectory suggests this goal is well within reach. NN Group anticipates improving the diversification of cash flows and progressively better conversion from operating capital generation to free cash flow, going beyond the 80% rate presently achieved.
Solvency remains robust overall at 201%, yet the company does not regard its solvency position as sustainably above the 200% threshold at this moment. Ongoing volatility has led to a minor single-digit negative impact on the solvency ratio since June, but the business remains committed to optimizing solvency sensitivities and has taken management actions to preserve capital, ensuring future dividends and share buybacks can be supported by a strong capital base.
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Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's analyst conference call on its half year 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 a 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 for 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. Thank you very much, and good morning, everyone, and welcome to our call to discuss NN Group's results for the first half of 2023. I'm joined today by our CFO, Annemiek van Melick; and our CRO, Bernhard Kaufmann. To kick things off, I will provide an overview of our strategic and financial highlights from the past half year. Following that, Annemiek will take you through our investment portfolio, financial performance and progress versus our 2025 target and capital position in more detail.
We have made good progress towards achieving our strategic targets since announcing them in our investor update in November of last year. Our ambition is to be an industry leader known for customer engagement, talented people and positive contribution to society, including our efforts to tackle climate change. One of our key performance indicators is our Net Promoter Score, which measures customer satisfaction. By 2025, we aim for both our Netherlands and International units to be significantly above the market average. And I'm pleased to report that 8 out of our 11 business units are either above average or on par with several European business units showing an upward trend.
We are committed to providing the best pastime customer experience to further improve these scores. I'm also proud of the high levels of engagement amongst our employees, which is reflected in our engagement score of 7.9. We continue to focus on creating an attractive and inclusive workplace while we recognize that there is room for improvement in areas such as process efficiency and collaboration between departments. As part of our commitment to tackle the impact of climate change, we are working towards achieving net 0 greenhouse gas emissions across our businesses by 2050, including in our investment and underwriting portfolios as well as our own operations. In July, we updated our climate action plan with new targets to reduce carbon emissions, Non-life P&C commercial lines by 26% and in our Dutch residential mortgage portfolio by 34% by 2030.
We believe that the biggest impact we can make in tackling climate change is through our investments. We have made significant investments in climate solutions, including green bonds for a total of €9 billion. In summary, we are making good progress towards achieving our strategic KPIs, which will ultimately drive our financial results and create value for all our stakeholders. Innovation and digitalization play an important role in achieving our targets. So let me give you an example.
At NN Group, we are committed to enhancing our digital capabilities to provide our customers with the best possible experience. As part of this commitment, we have become one of the first companies to work with ChatGPT in our own secure environment at scale. This is part of a journey we have been on for more than 2 years. Let me give you a practical example of how we have implemented a center agents would manually enter notes in our systems regarding key topics discussed with customers after the call was completed. With ChatGPT, a short summary of the call is automatically proposed, which the agent then reviews before entering into our systems.
First of all, it improves the consistency of how we log calls, which makes customer analysis more effective. Secondly, it has resulted in a significant increase in efficiency, saving an average of 3.5 minutes per call on approximately 2 million calls per year. This is particularly welcome in ties of continuing labor market shortages and the use of artificial intelligence has allowed our agents to focus more time to helping customers. In turn, this has contributed to an even greater improvement in customer satisfaction. We are proud to be at the forefront of digital innovation and remain committed to using technology to enhance our customer experience.
Our efforts in the past period have also resulted in a strong financial performance. Annemiek will give more color on our financial performance [indiscernible] with a Solvency II ratio of 201%, and strong operating capital generation of almost €1 billion, up 15% from the first half of 2022 based on OCG, excluding the Asset Management business. We believe our OCG delivery is of strong quality, reflecting growth in underwriting results and fee business, which we, as a management team, can influence, partly offset by a lower contribution from Netherlands Life due to adverse financial markets. In the current inflationary environment, expenses remain a key focus point for us. We remain disciplined when it comes to managing our cost levels, and we continue to track well on the expense guidance that we have given for Life, Non-life and Banking.
Our VNB decreased mainly due to lower sales in Japan, following the business improvement order imposed by the local regulator at the beginning of this year. Additionally, our growth in Europe is driven by the shift to protection products with attractive margins, currently 4 percentage points higher than the total new business margin. For Non-life, we reflect the positive effect largely coming from discounting under IFRS 17 into our combined ratio guidance. Together with a smaller positive effect from expected strong continued business performance, we lowered our combined ratio guidance to 91% to 93%. Our strong performance and robust balance sheet allows us to continue to deliver attractive capital returns to our shareholders, and I am pleased to announce a proposed 2023 interim dividend of €1.12, representing a 12% increase from the first half of 2022.
Within Non-life, the market has been consolidated. We took a step towards this in 2017 with our acquisition of Delta Lloyd, followed by the acquisition of the VIVAT Non-life business, which was announced in 2019, while several other players in the market also made acquisitions. In 2015, the top 3 players held a combined market share of less than 50%, which mostly driven by our consolidating efforts has since increased substantially. Today, the top 3 players hold more than 2/3 of the total market. This consolidation has led to improved pricing discipline in the non-life market, resulting in improved combined ratios and higher operating results.
Additionally, we strengthened our business with improved underwriting, data analytics and significant expense synergies. In the past year, our Non-life business experienced overhang in its remittances, driven by, for example, integration activities. As a result, the conversion of operating capital generation into remittances has been relatively low. However, with most of these impacts now behind us, we expect future remittances to be more in line with OCG and at higher levels than observed in the past. The stronger remittance pattern from Non-Life was embedded in our investor guidance of free cash flow to grow at a mid-single-digit pace.
We are excited by the strong performance of Non-life today and the potential to exceed guidance. But for now, we keep our €325 million intact. Within Europe, our shift to protection products is helping us to deliver better shareholder value in Europe. We operate in 9 countries, mostly in Central and Southern Europe, where insurance markets tend to be underpenetrated. Our Insurance Europe segment has shown significant growth, mainly driven by the shift towards protection products with attractive new business margins.
You can see the protection new business margin versus the total in the lower chart on the left. Recently, protection margins have come down as a result of higher interest rates. From an overall margin perspective, this was offset by our pension business, which faces the opposite dynamic. It is important to note that the recent slowdown of the banks selling less mortgages has had an impact on our protection sales. Our tight agents have been able to offset this trend to a large extent.
We see evidence that the mortgage cycle is turning in our European footprint, which should accelerate protection sales in our European business margin. The combination of both margin and volume effects has resulted in double-digit VNB growth, which is recognized in OCG over time. For the second half of 2023, some slowdown of OCG first half of 2023 is expected. As a result, we are comfortable in our ability to achieve mid- to high single-digit OCG growth from 2021 levels, the basis behind our OCG target of €450 million in 2025. And thereby, almost doubling the OCG level versus 2018.
In our home market, the Dutch pension system is undergoing several changes, including the continuing shift from defined benefit to defined contribution, consolidation of the DC market and new pension agreements that will result in closer alignment between pension funds and insurers. NN is the undisputed market leader in the defined contribution market and is well positioned to capitalize on these opportunities during the 5-year transition period to the new pension system. We are also active in the market for pension buyouts and have a solid track record. We remain committed to maintaining pricing discipline when it comes to buyouts and ensuring efficient capital allocation. NN is in a strong position to seize the opportunities presented by the changing Dutch pension market,, thanks to our unique ability to offer a full range of pension solutions in the Netherlands.
Our integrated approach to pension planning has been highly valued by employers and brokers who appreciate the convenience and the efficiency of having all their pension needs met by a single provider. We have a leading broker satisfaction score in the Netherlands. Our unique combination of products and additional servers, coupled with our solid investment performance in DC life cycle funds, has helped us to achieve higher retention scores of more than 90% and continued strong net inflow of assets in DC. In the first half of 2023, we realized €1.3 billion of net inflows and we target to achieve €32 billion of assets under management in DC in 2025. We combine our strong business performance with a clear capital return policy.
Thanks to the strong long-term growth profile of OCG and free cash flow, we are able to consistently provide our shareholders with an attractive and sustainable capital return. As evidenced by the chart, we have a proven track record on delivering on this commitment. Since the IPO, until the end of last year, we paid out nearly €8 billion to our shareholders through dividends and share buybacks. And today, we are pleased to announce an interim dividend of €1.12 per share. We expect to continue to deliver on our capital return policy with a progressive dividend and a share buyback of at least €250 million per annum.
And now I will hand you over to Annemiek to give you more detail on the robustness of our balance sheet and our financial performance.
Thank you, David, and good morning, everyone. Happy to be here to present NN Group's strong set of results. Let's start with the investment portfolio on Slide 11. After the banking turmoil and marker asset quality, particularly on our liquid assets such as real estate and mortgages. To address this, we've improved our asset disclosures, which we typically do by presenting you even more slides, which you can find in the appendix of this presentation.
Now let me take you through some key highlights here. On real estate, our exposure is diversified across various segments with a core profile and were underweight offices. We maintained strong occupancy rates averaging more than 95%, and we have the ability to price inflation through rental income for the majority of our portfolio. After many years of positive revaluations, we've seen roughly equal corrections in both the second half of last year and the first half of this year, as we've also guided on. Our real estate partners expect the pace of these negative revaluations for NN's portfolio, to slow down in the second half of '23.
During the lower for longer interest rate environment, we strategically invested in Dutch mortgages, now representing more than 1/4 of our total investment for [indiscernible], as you know. Now let me explain why we see very negligible real loss potential on this asset class. Holland has very strict bankruptcy laws. If you're unable to repay your mortgage, you do remain liable even after selling your house. Around 25% of our mortgages is guaranteed mostly by the Dutch state.
We hold long maturity mortgages with fixed rates, limiting the refinancing risk for our customers. 76% has a fixed rate period of more than 10 years in our book. As of 2013, tax incentives are only in place for fully redeeming mortgages, which helped to structurally bring LTVs down. The average LTV is low at 55%, with losses close to 0. Even during the financial crisis, when the average LTV was over 90%, losses peaked at only 10 basis points.
So overall, we're confident in the high quality of our investment portfolio, including our liquid assets and remain committed to a strong and resilient balance sheet, as demonstrated on the next slide. Now despite the aforementioned continued negative real estate revaluations as well as interest rates steepening, our [Audio Gap] increased by 5 percentage points since year-end to 201%. Strong operating capital generation of almost €1 billion added more than 11 percentage points to the ratio, which more than offset the impact from capital flows to shareholders. The overall impact from markets on the ratio was neutral. Negative impact from revaluations and interest rates mostly steepening was offset by the positive impact from credit spreads.
During the first half of this year, we took management action to reduce the sensitivity to interest rate steepening, which actually helped us to preserve capital. During the same period, the solvency ratio of Netherlands Life was also robust and ended at 190% versus 191% at the end of 2022. Contrary to last year, during 2023, mortgage margins have been stable at a somewhat contracted level versus the long-term average. We base our capital planning on our view of normalized mortgage margins rather than point-in-time distortions. As one, we see negligible real loss potential on this asset class, as I've just explained, and 2 mortgage margins dynamics affect both stock and flow and do cancel out over time.
We remain in favor of reducing our solvency ratio sensitivities and are continuing to work to calibrate the mortgage margin dampener, whilst at the same time, as with all management actions we do carefully weigh the benefits versus the cost. Now let's take a look at our OCG performance on the next slides. It obviously came in strong in the first half of the year and increased by 15% to nearly €1 billion compared with the same period last year, excluding the Asset Management business. This growth was driven by strong business performance and a benign weather environment at Non-life, continued solid growth in Insurance Europe and driven by higher interest results. It also included positive variances at our internal reinsurance business.
These effects more than offset the lower OCG contribution from Life, mainly due to lower positive experience variances and market impacts as well as a somewhat lower OCG from Japan. Now looking ahead for 2023 and based on current markets, we would expect NN Life to stay close to its H1 run rate. For Non-life, the 90.1% combined ratio in the first half versus our revised lower target of 91% to 93% already indicates that we would expect some normalization, while we also saw storm poly arrived early in the second half of the year. We would expect the bank's current high deposit margins starting to normalize as well as a normalization of the positive experience variances at our reinsurance business. But still, even if adjusted these normalizations, we could hit our 2025 target of €1 billion OCG 2 years ahead of plan.
And equally important, it includes a more diversified contribution mix consisting of a relatively higher contribution from Non-life, Insurance Europe and bank. Now let's move from OCG to the operating result, the first time we based it on IFRS 17 and IFRS 9. IFRS 17 has no impact on our main targets and capital return policy. For your convenience, we've included several slides in the appendix to explain the main drivers of the transition, including our view on our ability to deliver structural CSM growth. Overall, we see strong business momentum visible in the operating capital generation of Non-life Banking and Insurance Europe come through in the operating IFRS result as well.
The same holds for the favorable claims experience in our internal reinsurance business and other. As said by David, we have taken our combined ratio guidance down from 93% to 95% to 91% to 93%, largely due to discounting benefits under IFRS 17, but also to reflect our confidence in the continued strong performance of our Non-life business. Our net result is down compared to the first half of 2022, which benefited from the €1.1 billion gain on the sale of NN IP. Excluding that gain, the net result is broadly stable. The current period mainly reflects a higher operating result, offset by lower gains, losses and impairments.
Now before I hand over back to David, let me say a few words on our free cash flow generation and balance sheet. With a free cash flow of €832 million in H1, we are well on track to deliver on our 2025 target to achieve mid-single-digit free cash flow growth compared with the adjusted '21 level. This includes the expected improvement of the non-life remittance pattern, as David already mentioned, the continued growth in international and the stated contrary to earlier indications, we already expected [Audio Gap] dividend from the bank this year is feasible despite the required countercyclical buffer buildup. Now going towards 2025, we hence expect our OCG to become -- our free cash flow to become more diversified, and we also expect our OCG free cash flow conversion to gradually improve from the current level of 80%. Despite the repayment of €500 million of senior notes in January, our cash capital position remained strong at €1.9 billion.
We actively reduced our '24 refinancing risk by executing a €1 billion liability management transaction in May. Our leverage ratio reduced to 17.8%, and we have ample tiering headroom. Now with a solvency ratio of 201% after absorbing 12 months of negative real estate revaluation, having actively reduced steepening risk, strong free cash flow generation, and the leverage position that gives us ample flexibility, we're very comfortable with our balance sheet.
And with that, I hand over to you, David.
Yes. Thank you, Annemiek. So in the first half of 2023, we have made great strides in executing our strategy. We have been able to maintain a robust balance sheet and capital position with a solvency ratio of 201% and a holding company cash capital of €1.9 billion. This puts us in a strong position to weather future challenges and to continue to invest in our business and keep flexibility to seize opportunities.
One of the key drivers of our success has been our diversified portfolio of businesses. OCG in the Netherlands was down year-on-year due to adverse financial markets. But this has been more than recaptured by strong underwriting results and fee growth in other business units. This has enabled us to generate strong operating capital with a year-on-year increase of around 15% on a like-for-like basis. And even in the face of challenging macro environment in various geographies, our growth momentum in Europe has continued to accelerate with new sales up 9% compared to last year.
Looking ahead, we remain committed to our capital return policy, which includes a progressive dividend per share and an annual share buyback of at least €250 million. And I'm pleased to announce that our 2023 interim dividend will be 12% higher at €1.12 per ordinary share. In summary, we are pleased with the progress we have made over the past year and we are confident in our ability to continue to deliver strong results for our shareholders, customers, employees and society. Thank you for your attention, and we will now ask the operator to open the call for Q&A.
[Operator Instructions] We will now take the first question. It comes from the line of Cor Kluis from ABN Amro ODDO BHF.
Good morning. Congratulations with the results. A couple of questions. First of all, on OCG capital generation, you make -- approval, you might make to €1.8 billion this year. That's the same as the target in 2025.
Still, you don't increase your OCG guidance for 2025. Could you explain the thinking around that? Do you believe that there are some one-offs in this year? Or is there a better moment to update the OCG target for that year? But also thinking about it.
So that's 1 question. The other question is about the Solvency II ratio, which was 201%, of course. Could you give an update what it is at this moment? There's quite a lot of volatility, of course, due to the volatility adjusted credit spreads, et cetera. So maybe you could give an update on that one.
And last question is about Slide 12. How you see the Solvency II ratio go forward? Could you elaborate a little bit more on the category other, that's minus 1%, but quite a lot of items, of course, in that one. Could you please highlight the largest items in that minus 1%? That's it from my side.
Yes. Thank you, Cor. Let me give the three questions to Annemiek.
Good to hear your confidence in our OCG and then your question of potentially raising the target. And as I said, based on our strong H1 OCG of nearly €1 billion, we could already hit the €1.8 billion target for '25 this year. There are a couple of elements though that you would have to consider on that. Non-life enjoyed very benign weather, whilst we did start H2 already with the Poly storm. We also enjoyed favorable pricing for Non-Life.
On bank, we really delayed the pass-through of rate hikes on ECB on the savings rate, and we would definitely expect some normalization there to come. And in addition, in the category other, we had higher positive experience variances and lowering of the SCR of our internal reinsurance business, which is the main reason why you see the positive development in the category other, and we would largely treat them as one-offs. So you'd have to correct for those. So strong OCG so far could already hit the €1.8 billion target, but definitely some specifics to take into account, so no change to the target. On your question of solvency year-to-date, we've indeed seen quite some market impacts going around, and we would expect them to have a low single-digit negative impact.
We see negatives from equity markets, a lower VOLA due to corporate spread tightening, some residual real estate revals but we also see some positive from higher rates and further tightening of mortgage margins come through. So net-net, we'd expect to be low single-digit negative from markets year-to-date on solvency. On the category Other, on Slide 12, that's really a mixed bag of a lot of smaller items. Quite some technical items, and we did sell a bit of equity in H1 '23, which also flows through that category. Nothing really outstanding there this half year though.
We will now take the next question from the line of Farooq Hanif from JPMorgan.
Firstly, on Solvency II. So given that your sensitivities have been reduced quite a lot on interest rates and on the steepening especially, can you -- have you revisited in your mind, what sustainably above the 200% may mean? And whether it's more likely that now you can be sustainable above 200%. And within that question also, what are the last updates on potentially needing to or wanting to update the mortgage model -- the SCR model for reducing volatility until the model change? That's question one.
Question two is just going back on the OCG. Are you expecting 2024 OCG to be kind of higher or lower than 2023? Given what you said in terms of kind of the sort of one-offs and those kind of impacts? And lastly, I'm sorry, slipping a third question. But on the CSM growth, in IFRS 17, I noticed the numbers are not high, but you did mention some things like, for example, the improvement order in Japan.
Are there things that we should take into account when we forecast the CSM growth that could be better than the roughly 1% that we're seeing in 1H?
Yes. Thanks, Farooq, for your 3, to be honest, 4 questions. Let me give the question on the latest update on the mortgage volatility damper now to Bernhard and the rest of the questions will be then covered by Annemiek.
Farooq, on mortgage spread volatility, as this is really a Solvency II stock and flow item that canceled out over time, we are still looking into how we can reduce solvency ratio sensitivity, also coming from this impact. And if we compare 2023 to last year, mortgage spreads have been less volatile this year, but also the level is a bit lower versus the long-term average. That means in now the decision to take management action here, we're carefully awaiting the costs and the benefits on this, but we are here in the frame on the impact also from this. But it relates or it will not change or it has not changed our view on trigger levels or sustainably above 200, what kind of impact the triggers have on our decisions.
Yes. Annemiek?
On your question on when we would qualify a sustainably above 200, I think a couple of items here. We're obviously highly committed to our progressive dividend per share and the annual buyback of at least €250 million. As you know, we define excess capital as a group solvency ratio that's sustainably above 200. At this point in time, we're not there. We've seen low single-digit market impact since June, as I just discussed, and our real estate partners are expecting some further negative real estate revals, although at a lower pace in the last 12 months.
We'll also have our annual model and assumptions review coming up in H2. And then obviously, for '24, a bit further down the road, we have the VAR reduction coming up. We obviously remain focused on getting there. And if we have excess capital, we will return it to shareholders unless we can use it for value-creating opportunities. Meanwhile, as said, for now, we remain highly committed on a progressive dividend per share and the annual buyback of at least €250 million.
On your question related to OCG for '24, I think we've given some indications for our thoughts on the OCG on '23, and I think it's too early days to already give a forecast on' '24 there as well. So you just have to do with the target that we still have out there of 1.8 for '25. On CSM, we did indeed give a bit more disclosure there, as you can also see on one of the slides in the appendix. I think that you're referring probably to the kind of Slide 34 that we have, Now on CSM, we're confident that we can deliver sustainable growth there. Due to the use of the fair value transition approach for a large part of the Dutch Life business, Netherlands Life only contributes 50% of our CSM versus 70% of our liabilities.
We expect the net organic CSM buildup of Japan, Europe and our DNA business out of Non-life to structurally compensate for the net release in Netherlands Life. In our financial statements, you'll see the net growth from business operations close to €60 million, as you can also see within that table. However, we still need to further improve our CSM disclosure as, for instance, the expected return of riders and top-ups mainly related to our European protection business is currently included in the change in estimates line. If we would take them out for H1 and add them to the insurance contracts initially recognized, that would lead to an organic CSM buildup of over €100 million versus €60 million which would roughly equate to around 2% for the first half of the year. It's too early for guidance on the actual expected level of growth.
We're still getting into this new concept. And also if you think about not so much the riders, but really the top-ups were international. They're also driven by inflation, right? So there may also be some impact there. So it's too early to already give guidance on a structural growth level.
On the other hand, we do take some comfort because if you look at Japan, it nearly lost 50% of VNB due to the sales impact of this FSA order, but it still only showed a very small net release in season. So we would clearly expect to see growth in a normalized environment there in Japan. So all in all, it's too early to really set kind of a growth rate expectation for CSM but we are encouraged by these figures, and we're confident that we can actually deliver a structural CSM growth here.
We will now take the next question from the line of David Barma from Bank of America.
The first one, just to come back on the mortgage sensitivities. Are you saying that the dampener and the change to the model are ready and you're just waiting for better market conditions to implement it? And then secondly, on the investment result contribution in OCG, this seems very low in the first half. It's down more than 30% year-on-year. Can you explain what the drivers are in that line, please?
And then thirdly, on Europe, thanks for the additional disclosure there on the performance of the segments. Can you give a bit of additional color on the effect of the slowing mortgage markets on protection sales and what we could expect as this normalizes in terms of VNB growth?
Yes. Thank you, David, for your questions. Let me start on the European disclosure question and the mortgage sensitivity. And then Annemiek can answer the investment contribution question on the OCG drivers. Maybe start with Europe.
Yes. So overall, we have been focusing for a long time on protection and the overall protection gap and trend hasn't changed. So we continue to see a lot of opportunities there. During quarters, of course, dynamics change. What happened is, is the bank started selling less mortgages lately and that also meant for us that we sold less credit insurance that was attached to these mortgages.
That also explains a bit of the drop that you see in protection because typically credit-related -- or credit products that are attached to more tend to be of a very good margin. We are seeing the first signs step-by-step of banks stepping up their mortgage sales again in the European markets. So if that happens, then you could expect a further increase in the average protection margin that we see because that part of the protection products has a higher margin. And obviously, also a positive impact on the VNB. So far, I think the tight agents have been able through our bionic agent program to offset quite a bit of the dip that we see in mortgage sales.
So -- and I think it just shows the strength of having a multi-distribution platform that we have. Now all in all, obviously, new business contribution is a big driver of OCG in Europe. New business contribution was positive, partially related to these extra sales that we did via agents and partially also MetLife contributing positively. So ongoing, we do expect a continued long-term positive trend for Insurance Europe that will be a significant contributor to getting to the €450 million OCG target that we have set. On the mortgage dampener, I can be quite clear that process that's still ongoing.
And we've always said that if we would implement this, we would do this in the second half of the year. And so that process is still ongoing. Then Annemiek, on the investment contribution of OCG drivers.
Yes. If you look at the investment income for the group, it's probably best to compare the investment income with H2, so the €677 million versus indeed the €620 million that we realized in the first half of this year. Now on H2, we already guided that we would expect that to be down by roughly €75 million, largely based on lower equity given that we sold around €400 million in Q4 last year and negative real estate revaluation. So that €75 million would be €37.5 million kind of on a half year basis. In addition to that, we also saw corporate and mortgage spreads tightening, which obviously had a negative impact on OCG throughout H1.
In Q2, we actually saw some additional residual pressure, for instance, on the spread tightening on the longer-dated government bonds. That obviously had a positive impact on solvency, but we've seen some negative impact coming through on OCG. So those are really the main drivers where the investment income came down from H2 last year versus H1 this year.
We will now take the next question from the line of Nasib Ahmed from UBS.
First question on Japan. Annemiek, you said that you expect a normalization in Japan and VNB to not be down year-on-year when that happens. When do you expect that to happen? How long do you think the FSA order remediation is going to take?
And then secondly, on the Netherlands pension reforms, what IRRs are you expecting to achieve on the DB business? I think previously, you said around less than 10%, but with higher rates, do you expect higher -- greater IRRs now for that to be economically value adding?
Yes. Thank you, Nasib. Well, on Japan, just to avoid misunderstanding, We've seen the VNB is roughly half of what it was last year. We continue to see good sales in the protection corporate life products, but the savings products or the short-term savings product debt sales have significantly dropped and that led to a roughly half the VNB for Japan in first half year. We do expect a similar trend also for the rest of the year.
Obviously, we're doing everything, and we're working with the FSA to work and to comply with the business improvement order that we have received. But how long that will take is obviously not up to us, but up to the FSA. But for the rest of the year, I would expect still the trend that we've seen in the first half to continue meaning a significantly lower VNB in Japan. Now obviously, the good news is, is that what we have seen in Japan is that persistency of the portfolio is very good, 5/6 of the OCG actually comes out of the existing portfolio. So that means that also the OCG can hold up well given that the portfolio -- the current portfolio just continues to perform well.
On the pension reforms, I think you mentioned DB, but yes, so good to be aware that, in general, DB will stop to exist. So the new accruals will all be in DC and then there's obviously the possibility of buyouts. Now DC, as we were saying, we have a very good inflow of new pensions with €1.3 billion. We expect to make 15 to 20 basis points on the DC business, and we continue to do well there. The potential of buyouts, there's currently a few buyouts in the market, but it is relatively quiet.
Now the expectation is that due to the pension reform, a lot more buyouts could be coming to the market. It is a lumpy business. But so far, we've been thinking that probably over the whole period, around €25 billion of buyouts could come to the market that assumes that pension funds with €2.5 billion or less would be probably interested in a buyout. So far, we've been targeting a high single-digit return on these buyouts. Now what I expect is that pension funds have to deliver their transition plans in 2025.
So it is probably realistic that more of the buyout you would expect in the period, but after 2025, and it's also possible that given the amount that might come to the market, we should be able to increase our margins a bit higher than the high single digit that I'm talking about. But of course, we need to see how market dynamics will evolve. We will be very disciplined in the bio market. I mean we're the biggest player. We don't need to scale.
So we will only do these buyouts if we can make an attractive margin on it.
Just to confirm, the margin is an IRR margin, right, the high single digit?
Yes.
We will now take the next question from the line of Michael Huttner from Berenberg.
Brilliant results, amazing. And I was going to ask first question, but it's whether you expect your share price to be up 10%. No. I have 2. One is on the real estate, one is on the protection.
And if I may, that's really unfair, but maybe you can give a figure for the net inflows which you expect going forward from the €1.3 billion.
On the protection, so the -- my understanding of where you say the protection margin 4 points higher than the average. Is there any echo of COVID claims coming through? I asked because your peer, Aegon, is in the U.S., of course, they set aside a lot of reserves for young age and also older age higher mortality and so I'm just wondering. On the real estate, you gave indications that things were not so bad, not so good, but I just wondered if you could maybe clarify just a little bit how much you took of 6% in the first half, how much still to come? And when you spoke about, I think it was occupancy rate, I noticed in the slide, there's a figure of below 90%, somewhere around 80% or something and you say it's a one-off.
So maybe you can say what would the figure be if you exclude that one-off? And then really, I'm really sorry, but maybe -- on one of the slides, you said the DC business, €1.3 billion in the first half, when you say, well, the prospects are good, et cetera. What could we look forward to what you're thinking of?
Well, thank you, Michael, and given you started with a complement, we'll forgive you then that you have a lot more than 2 questions. So let me start on the protection and the DC business and then Annemiek can answer the question on real estate. Yes, protection margins. So as you can see on the graph on Slide 7, you can see how protection margin have been developed, but it's a -- so they continue to be very attractive. They did come down, as I said, due to lower credit sales.
You would expect some pickup again of that once banks start selling more mortgages again. Specifically on COVID, this is not something that we're concerned around. So that's not expected to be a big role in the European markets. On DC inflows, we're very happy with the €1.3 billion. This is related to that we had a retention of over 90%, and the amount of new business that we were able to get in that was to more than offset say, the part of the business that we did not retain.
Now there's always a bit of cyclicality because most of these contracts are 5 years. So you don't have every year 20% renewing, sometimes a bit more, sometimes a bit less. Also for this year, we expect a relatively significant amount of pensions contracts coming up for renewal. But there will always be a bit of cyclical effect in there. Overall, the flow, I expect to be positive because this is not only the performance of our business, but over time, you would also expect the pension for farm to kick in, and that means that a certain amount of pension funds that today are not in the market will likely bring their new accruals into the DC space that we operate in, and we should -- given our market share, we should be able to get a significant chunk of that as well.
So overall, I continue to expect positive business inflow. We set a target of €32 billion of assets under management for DC. And that's still what we're aiming for. On real estate, Annemiek?
Yes. Thanks for the question, Michael. Always good to realize that someone actually made it to the appendix Slide 30 and spotted some lower occupancy rate. Let me start with that one. Indeed, on offices, we have a temporary lower occupancy rate of 81%, which is really driven by the deliverance of a new prime location office in Amsterdam, which was delivered rind around the closing days.
We're just finalizing the last negotiations there are on a couple of floors and a bit tweaking what color of the carpet it should be, et cetera. But once we're done there, we would expect that occupancy rate to go up again as well to normal levels. So all in all, we have a 95% occupancy rate on our portfolio. As I said, we've we're very diversified across segments, geography, strong occupancy, and we have the ability to price through inflation really for the majority of the portfolio. If we look at kind of the revals that we've seen, it was roughly 6% in the second half of last year, another 6% in the first half of this year.
And what we've seen there, if you look at our portfolio, we have a pretty big residential book and a relatively large industrial book, which is mainly consisting of logistics. In here, for the last 12 months, we did see some revals coming through whilst they still have pretty strong dynamics, these underlying businesses, and that's really driven by the liquidity that there was in both residential and in industrials of actual transaction having taken place. Both categories continue to be most of interest to people wanting to invest in real estate, and we would definitely expect the pace of the actual revals to slow down on these offices were underweight. And we're all on prime locations with a strong occupancy rate. So minus 6% last half of last year, minus 6% first half of this year, we would expect that to still see some revals but at a lower pace coming through in the second half of this year.
We will now take the next question from the line of Andrew Baker from Citi.
Just 1 from me, please. Are you able to say anything about the upcoming unit-linked case? I think it's the end of September now. Can you just remind us the process, next steps and anything you're able to say there would be helpful?
Sure. Thank you, Andrew, for your questions. Maybe just to put it in perspective, so far, we have 3 collective cases where we had rulings. To a very large extent, these claims were all that the foundations made were rejected. Well, apart from that, it is a complex case.
So our disclosure continues to be that we cannot reliably quantify the impact. Now obviously, in September, we would expect the first ruling of the Court of Appeal, and we will study the outcome. Now it is very possible that this is another intermediate step because an appeal to the Supreme Court is still possible, and we will have 2 more Court of Appeal rulings upcoming. So that means that our disclosure also has not changed.
We will now take the next question from the line of Benoit Petrarque from Kepler Cheuvreux.
Yes. The first one is on the OCG in Non-Life. So very strong. I was trying to get the kind of normalized OCG for Non-life in H1. I think you mentioned positive experience variances and also favorable pricing arrangements.
And I was trying to understand why you're not kind of more positive for the long-term prospect of Non-life OCG. Do you expect something a bit tougher in the second part of the year? I mean there have been a storm in July. But beyond that, do you think claims will normalize?
And the second one was on the OCG for the bank, which was very strong. I think you mentioned €80 million run rate per year. I think you've done €70 million in H1. So how far are you -- kind of when do you expect this normalization to happen or quick that will happen? I guess this is linked to the pass-through rate on savings products.
So do you see already something happening in H2 and normalization there?
Okay. Thank you, Benoit. Annemiek?
Yes. I think, Benoit, on Non-life, I said, we indeed see a strong development there to realize that there is just no storm whatsoever included in the first half of the year as it was very benign. Second half of the year, we started with Poly. And we've also seen quite some favorable pricing there. We could even hit our €325 million target, obviously, for this year.
Looking at a normalized run rate for Non-life, I think that's a bit too early to say where that would go. On a bank, we've indeed seen a positive impact from interest rate results. We also saw some lowering of the risk weight given the fact that we've increased a bit the NHG position coming through that result as well. In terms of normalization, we would expect already in the second half of the year for the bank to see some normalization coming through via the savings rate side, and we would expect a bit more normalization potentially thereafter. I think what we've clearly said in the OCG update that we've given that based on the current OCG of H1, we could already hit this €1.8 billion target for '25.
And I think we've also given you some of the elements to take into consideration that are rather specific. For Non-life, as I said, for the bank, but also really the higher performance of NN in other. So I think that's probably it for now.
Just a question on the solvency ratio. Do you still have in mind a 1-year time horizon above 200% before kind of increasing your buyback? Is the 12-month time horizon still valid currently?
Yes. On the sustainability of 200%, I don't think we ever tied a certain horizon to that. And just to confirm what I said, we really remain committed to the progressive dividend per share and the annual buyback of €250 million. At this point in time, we're not in a situation where we would consider ourselves to be sustainably above the 200%, and we've also given the reason for that, right? It's the low single-digit market impact since June, still some further negative real estate, revals expected, our upcoming annual model and assumption review, and then we have a bit of UOR reduction to flow through.
We do remain focused on it. And if we have excess capital or return right, unless we can use it for value-creating opportunities.
We will now take the next question from the line of Ashik Musaddi from Morgan Stanley.
Just a couple of questions I have is, first of all, I mean, you gave certainly good clarity on how to think about Solvency II for second half. But is it possible to get some more color on what these assumption updates that you're talking about are? I mean what sort of expectation we should be having with respect to -- can it be a positive number? Or if it is going to be a negative number, i.e., you have much more visibility on a negative number rather than a positive number? Or is it just we don't know at this point?
So that's the first one. And second one is, you mentioned earlier -- Bernhard, I guess mentioned earlier about the Solvency II dampener on mortgage spreads. So you get the mortgage internal model approved, there might be a negative impact on Solvency II. Is it possible to quantify that? What could that be?
And second -- and third question is in the CSM role forward, where do we see that unwind of discount rate? Is that the line item called financing results through profit and loss, that €32 million in first half. Is that the unwind of discount rate? Because it looks very small. I mean I would have assumed that unwind of discount rate is basically a release of your spread margin in a normal world expectation.
So that €32 million looks pretty low. Any color on that would be very helpful.
Okay. Thank you, Ashik. Annemiek?
Yes. First, related to your question on model and assumption changes, it's just the annual review process that we'll go through in the fall, no specific indications that yet. I'll just have to go through and look at all the assumptions that we did. In addition, your question on the DA, as we said, contrary to last year, during '23, mortgage margins have been stable at a somewhat contracted level versus the long-term average. We base our planning on the normalized mortgage market margin, as I explained.
We remain in favor of reducing the ratio sensitivities and continuing to work on calibrating the mortgage dampener, but at the same time, as with all management actions, we also carefully weigh the benefits versus the cost. And it's just too early to further allude on that one. Now your question on the CSM unwind in -- of €32 million -- or the question of the €32 million on the finance result through profit and loss line item on the Slide 34. I guess you're referring to that one. That is a very detailed question.
I suggest we take that off-line with IR to go through the technicalities there.
Yes, sure. And just one thing on this mortgage spread, internal model thing, are we still -- because I would have thought that once you make an application to the DNB, it would be difficult to go back on that decision because ultimately, if you are trying to improve the model and if you submit something to the DNB, I mean I guess you cannot go, yes, we do it. Yes, we don't do it. So how does that discussion takes place? Because can you actually go back and tell DNB no actually, we don't want to do it anymore?
Well, we never comment on dialogues that we have with the central bank on any model changes, right? And what we're saying here is that we continue to work to calibrate the mortgage dampener, and at the same time, we just continue to look at the benefits versus the cost.
We will now take the next question from the line of Jason Kalamboussis from ING.
Yes. I had a couple of questions. The first one is on the local Solvency II rate. On Non-Life, if you look through 2018 to '22, I mean the Solvency II has been at 122%, 121%, 124%, 142%, 152% in '22. So I just wanted to have an idea if that has been also holding back, if you want, the Non-life remittances.
And now basically, we're back to normal, and that means that effectively, you will be starting to increase as per your target, the remittances coming out of Non-life. The second thing within, again, the low solvency ratios, just wanted to know if you are happy with the Dutch Life Solvency II ratio and capital that you have there? And what you should be expecting on the remittances front? And if I may, just a follow-up question just on the mortgage model, is there any chance that you can give us any range of what the impact can be on Solvency II if you decide to implement it? Should we expect a negative single-digit figure?
Okay. Thank you, Jason. Annemiek?
Yes. Thank you, Jason. Quite a few questions for me again. On Non-Life solvency, you're right there. We have seen that increasing over the last couple of years.
And the reason why initially, even though Life was generating operating capital, it didn't increase was also related to quite some model changes that were taking place.
Now we've largely left that behind us now on Non-life, which leaves us in a more structurally better position if you think about remittances out of the Non-life company. And that's also one of the drivers of us diversifying our free cash flow a bit away from Life by increasing the remittances from Non-life and the continued growth by Europe, et cetera. So it's an important element to note. On the Life solvency, Life is at lower solvency levels than historically, but the quality is actually a lot better given the lower UFR benefits. Now with a ratio of 190% and the possibility to further release capital if we want to through a longevity transaction, and as part of a group capital framework that currently has €1.9 billion of cash capital, there's ample room to absorb the challenges or gross opportunities, for instance, related to buyout markets or closed book.
So we're content with the Life ratio as we have it. In terms of the mortgage dampener and your questions there, I think we've, by now said everything we can say on the mortgage dampener on this call. I would just be repeating myself there by going through that again. So I'll leave it for that now and then we can go to the, I think, 6 more analysts in the queue apparently waiting to ask some of the questions.
We will now take the next question from the line of Anthony Yang from Goldman Sachs.
The first topic relates to Europe. I think previously, you guided a gradual OCG increase to €50 million in 2024 from MetLife Poland and Greece acquisition. I just wonder just confirm if that remains the case? And secondly, maybe could you give some comment on the Life experience from the in-force protection policies in Europe? And then the second topic is just on the Netherlands Life Solvency II ratio.
Given I think the 190% seems really strong, I just wonder is the group benchmark 150% to 200% a reasonable like proxy for the operating level for the Netherlands Life as well?
Yes. Thank you, Anthony. I think on MetLife, I think the MetLife is very clear. The integration is progressing very well. So it's likely that we will achieve the €50 million this year, so a year ahead of plan.
I also expect also some synergies still going forward after that. So it's been a -- the MetLife integration in Greece and Poland has been a positive experience. Lapses, portfolios are holding up well. The persistency is good. It has actually improved a little bit, which I think is a testament of the customer experience strategy is working well.
Clearly, with high inflation, you run the risk that some portfolios will start lapsing. That hasn't happened. And so we continue to monitor that, but the experience in the European protection portfolio has been positive. In Life, Annemiek?
Yes. On -- obviously, the group range indeed is 150% to 200%, and Life is our largest business unit. So it consists of large element of that. You have to take into account, obviously, that the sensitivities are a bit higher on the Life business so that we would also reflect in thinking about a Life solvency ratio.
We will now take the next question from the line of Iain Pearce from Exane BNP Paribas.
Just 1 from me. Just on the updated combined ratio targets. Should we read that move has effectively just been the result of the discounting and the undiscounted target is effectively in line with your previous target? And as the discounting rates will move around with interest rates, are you going to be thinking more about the discounted target so that 91% to 93% -- or will you be looking at the undiscounted combined ratio as regard to where profitability is?
Thank you, Ian. Yes. So the updated combined ratio guidance is indeed to a large extent driven by the accounting change from IFRS 17 for P&C, the -- this is mostly discounting for DNA, there's a couple of other effects. But in broad terms, the change at the current rates that we have used end of 2022 means that it's close to 2%. It wasn't quite 2%, I think it was around 1.7% and -- but we did change it with 2%, and that is also based on the underlying positive trend that we see in our -- in the underlying business.
Now obviously, there's a risk that if rates would move significantly that these effects will be different. But for now, we're comfortable with the guidance that we have given of 91% to 93%.
We will now take the next question from the line of Michele Ballatore from KBW.
Yes. So two questions. So the first question is on the solvency. I mean, in theory, how should we look at the management actions? Are these opportunistic measures that you take depending on the market move or you, let's say, have -- let's say, a set of actions that you can adopt in the next, I don't know, 1, 2, 3 years?
You're just waiting for, I don't know, approvals or the right moment to implement them? I mean how should we look at this, let's say, management actions on -- and their effect on solvency? And the second question is on the underlying trends in Non-life. Can you maybe add a little bit more color on what is the impact of inflation so far, what you're observing on your book and how pricing is adapting to that?
Yes. Thank you, Michele. Let me answer the question on Non-life and Annemiek can talk about management actions that we can do related to our Solvency II ratio. For Non-life, it's clear that we've been very proactively anticipating inflation. And therefore, from an early stage, we have been adapting premiums where needed.
Not all premiums were sensitive to inflation, obviously, around half of the P&C book. And there, we've been adapting premium. That has worked well for us. It also meant that this year, we only adapted premiums broadly in line with the expected inflation. We don't feel that we -- there's an extra catch-up needed where we're comfortable with the current pricing.
In terms of pricing dynamics, we do see a bit more pricing pressure, especially in motor, always in motor, I would say it starts -- so retail motor, there's probably a bit more price competition coming. There's always a company that starts with all sorts of discounts. Also in bank and direct -- bank channel direct, we see a bit more pricing competition right now a bit less in the broker channel. So you could expect some upward pressure there. But all in all, I think that it's still a good market for us.
We have been adapting premiums, so we're comfortable with the inflation risk and the reserving that we have done, hence, also the updated the new combined ratio guidance that we have given. On Solvency II, Annemiek?
Yes. I think on Solvency II, I mean, obviously, first to say that we're comfortable with the current level as we have it. If you look within that, we have been more active in the first half of the year by obviously reducing the steepening risk. And that's a discussion that's really coming out of the regular asset liability committee meetings that we had or we thought it would be a wise thing to do given the shape of the curve and the desire to preserve capital over there. So that was a clear proactive action that we took there.
Going forward, if you look at other additional actions and how we monitor them, one that we always continue to look at is obviously a longevity transaction. We still have around €10 billion to €12 billion in benefit group pension liabilities, could qualify relatively easy. And due to rate increases and given the fact that we've already actively reduced longevity risk in the past, the actual uplift of Solvency II will be a bit lower than we've seen before. But obviously, the attractiveness depends on the pricing, and it's something that we, therefore, continue to monitor.
We will now take the next question from the line of Farquhar Murray from Autonomous.
Sorry for dragging out the call. One quick, hopefully, brief question. In Non-life, actually in terms of conversion of cash from OCG into cash, you kind of flagged an improvement in Non-life. Is Non-life the only improver in terms of conversion rate? I kind of wonder if maybe there's some catch-up to come from Europe and also maybe a bit of an overshoot from Japan.
And I presume in terms of landing zone for the group, we should still be assuming something a bit below 100%. Is that right?
Thanks, Farquhar. Annemiek?
Yes. Thanks for your question, Farquhar. I think if you really look at what is a clear distinction with the past, then we would expect towards '25 Non-life to be the clearest example of that also given the development of solvency that we touched upon earlier on, on this call. Going towards '25, we would also expect for the total group, the OCG conversion into free cash flow to gradually improve from the roughly 80% level last year.
We will now take the next question from the line of Henry Heathfield from Morningstar.
Congratulations on the excellent results. Just 1 quick question from me, please. I was wondering if you could just talk me through in the Non-life division how much of the improvement there is operationally within claims due to lower claims and better pricing versus the discounting impact, please?
Yes. Thank you, Henry. So as we were saying, I think the 2% lower guidance that we have given, so let's say 1.7% is discounting and other effects due to the accounting change and the other part is business improvement. That is versus the guidance. Now obviously, when we came out with 90.1%, you've seen a bigger improvement and that is also related to indeed premium cases, better risk management and keeping our expenses down.
So it continues to be a combination of an accounting change, but also a positive underlying business trend, and we were a bit held, as Annemiek was saying, by benign weather as well. But all in all -- sorry, go ahead.
Just to clarify, the 2% improvement in the guidance, 1.7% of that is due to discounting. Is that what you're saying?
Yes. Well, it's not only discounting, but it's mostly discounting and it's related to, let's say, the IFRS 17 implementation.
And that's going to -- okay. Right. Is that likely to swing back in a couple of years though?
Well, obviously, discounting is related to interest rates. But again, there's other impacts too. On the D&A side, it works a bit different. But yes, based on what we see today in the current situation, let's say, it's 1.7% out of the 2% is related to the accounting change.
We will now take the last question from the line of Steven Haywood from HSBC.
Just 1 question here. You've obviously -- it seems to be that you've moved some investments from the 30-year point to the 20-year point to reduce the sensitivity of the Solvency II ratio and, obviously, take advantage of the yield pickup. Is there anything else that you can do in terms of changing the investment portfolio potentially to derisk it and that would benefit the sensitivities will actually benefit the Solvency II ratio?
I noticed that you had about 15% of your corporate bonds are noninvestment grade, which must be a little bit of a higher capital charge an investment grade stuff. So would there be a benefit of derisking there? And what else would you be doing on the equity portfolio going forward as well?
Okay. Thank you very much, Steven. Let me give this question to Bernhard.
So we are comfortable with our asset allocation and also operating very close to our target allocation and see no reasons for derisking or for deviating. The action that we took relates to interest rate risk management, so immunizing ourselves against steepening what we've done. We also see that the interest rate sensitivities for parallel shifts are quite low which is also within our active management of interest rates. So that is the framework we are operating in. And so we also see no further need for adjusting, especially in the SAA environment.
I would like to hand back over to David Knibbe for final remarks.
Yes. Thank you very much all for all your questions on the strong results that we presented today. Obviously, we remain very committed to our capital return policy of progressive dividend and a minimum share buyback of €250 million. And we look forward to engaging with many of you in the upcoming conferences and roadshows and investor meetings that we will have. And so finally, have a good day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.