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

Good morning, ladies and gentlemen. This is the operator speaking. Welcome to NN Group's analyst conference call on its first half year 2021 results. [Operator Instructions] Before handing this conference call over to Mr. Dave Knibbe, Chief Executive Officer of NN Group, let me first give the following statement on behalf of the company. Today's comments may include forward-looking statements, such as statements regarding future developments in NN Group's business, expectations for its future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statements. Any forward-looking statements speak only as of the date they are made, and NN Group assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or for any other reason. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Mr. Knibbe. Over to you.

Yes. Good morning, everyone, and welcome to our conference call to discuss NN Group's results for the first half of 2021. As always, I'm joined today by Delfin Rueda, our Chief Financial Officer; and Bernhard Kaufmann, our Chief Risk Officer. I will start off this presentation with the highlights of the first half year results, including the strategic and commercial developments. Delfin will then talk in more detail about our solvency position as well as the financial results of the group. After wrapping up the presentation, we will open up the call for Q&A. Let me start with the financial highlights shown on Slide 3. Our businesses across the group delivered an excellent performance in the first half of 2021. We saw a strong recovery in sales in Europe and Japan as COVID restrictions are easing in many countries and online sales are becoming more common practice for agents, brokers and customers. Our value of new business doubled to EUR 242 million on the back of higher sales as well as improved margins and business mix. At our Non-life business, we see encouraging signs of improvements, partly thanks to the measures we have been taking. The integration of VIVAT Non-life is also progressing well, with 90% of VIVAT premiums already migrated to NN systems. NN Group's operating result increased 21% on the same period last year to EUR 1.1 billion, driven by strong operating performance at all segments. Operating capital generation, or OCG, increased by 44% to EUR 780 million. This increase reflects a strong business performance with better Non-life underwriting results, high new business at Insurance Europe, and a higher net result at Asset Management. OCG was further supported by a higher investment return on the shift to higher-yielding assets and a positive contribution from banking under the new methodology. Our capital position remains strong with a Solvency II ratio of 209% at the 30th of June 2021, and we have announced today that we will pay an interim dividend of EUR 0.93 per ordinary share. More details on the solvency position and financial results will be covered as always by Delfin later in the presentation. Now let's turn to Slide 4. We continually strive to provide relevant products and services that meet our customers' evolving needs and to be there when they need us most. As I mentioned on the previous slide, we saw higher sales in the first half of 2021, which is really encouraging, and it illustrates the strength of our distribution channels as well as all the hard work in our units. The consequences of the pandemic in the past 18 months has highlighted the need for protection, for example, in the event of illness or loss of income as well as the current underpenetration of insurance in many markets. We continue to launch protection and living benefits products, for example, an income protection product in Japan which safeguards SME CEOs and their employees against the risk of not being able to work due to sudden illness or accident, as well as payment protection product in Spain. Besides the higher sales, we saw the business mix in Europe shifting to more protection products as well as an improved margin in Japan as a result of management actions, including repricing. All these actions resulted in a very strong value of new business in the first half of 2021, as you can see on the slide. On the other hand, we did all we could to help our customers deal with the damage caused to their homes and businesses during the recent floods in the Netherlands and in Belgium. And hence, claims managers were immediately available on site to directly assess damages and, where possible, process and pay out the claims straight away or to provide an advance on the claim amount. We are proactively approaching customers in the affected areas to check if they need our help. Our insurance products are designed to help people at times like these, and our customers can rely on us to support them, as should be expected from the market leader in the Dutch market. The full extent of the damage caused by the floods will only become apparent once billings have dried out and all claims have been submitted. While there is still quite some uncertainty, we currently estimate the financial impact on our results of around EUR 70 million, net of external reinsurance, in the second half of the year. Now turning to Slide 5. We are making good progress on executing our strategy as set out at the Capital Markets Day last year with a commitment to achieve resilient and growing long-term capital generation. Our strategy is built on 3 pillars. The first one being our resilient balance sheet, and Delfin will talk about that later. The second pillar is on generating strong cash flows in the Netherlands. The actions we are taking to improve the results of our Non-life business are starting to come through. We have a leading position in Dutch pensions as well as strong defined contribution, or DC, propositions. And we continue to attract inflows in line with our market share of around 40%. And DC assets under management currently amount to EUR 27 billion. At the same time, mortgage origination at NN Bank remained at a high level in a very buoyant Dutch housing market. These assets are also very attractive for our insurance investment portfolios, and a large portion is transferred to group companies as part of our shift to higher-yielding assets. And NN Investment Partners continues to attract new mandates with close to EUR 4 billion of net inflows of third-party assets while continuing its leadership in responsible investing and increasing the percentage of ESG integrated assets. The third pillar is to achieve profitable growth in Europe and Japan. Our distribution strength in Europe is enhanced by digital capabilities, making customer engaged and more efficient and more effective. For example, process digitalization to enable remote sales as well as the strong increase in lead generation have both led to a growth in new sales. Our strategy is focused on organic growth, but we are open to inorganic opportunities that create value. We recently announced the acquisition of MetLife's businesses in Poland and Greece as well as a 70% stake in Heinenoord, one of the largest Non-life service providers and insurance brokers in the Netherlands. Both these acquisitions strengthen our proposition in relevant markets, and they are also accretive to operating capital generation, offering an attractive return on investment. At the same time, we continue to manage our portfolio, and we perform a regular and thorough assessment of our individual businesses against our financial and strategic criteria. This has led us to announce the sale of our business in Bulgaria in February, and the transaction was completed in July. The strategic review of our asset management business that we announced in April is ongoing. We will update the market when we have any news to share. When we talk about generating value, we mean value for all of our stakeholders, and we measure this against our nonfinancial targets for excellent customer experience, engaged employees and our contribution to society, which are shown in the appendix. And I'm particularly proud of our highly engaged employees who are committed to helping our customers while also actively volunteering in community projects. Moving to Slide 6. Our commitment to shareholders is to provide attractive and growing capital returns, and we have been consistent in delivering on that promise as our track record shows. We announced today that we will pay an interim dividend of EUR 0.93 per ordinary share in September, which represents an increase of 8% compared to last year. This amount is calculated in line with NN Group's dividend policy, so as 40% of the pro forma 2020 full year dividend per ordinary share. And with that, I 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 in the first half of 2021. Our solvency ratio remains strong at 209% at the end of June. There are a number of items that impact the ratio. So let me take you through them. Firstly, operating capital generation added 9 percentage points to the ratio. I will talk more about the drivers of operating capital generation on the next slide. Market variance was positive, mainly reflecting the positive impact of the tightening of spreads, in particular mortgage spreads, and added 8 percentage points to the ratio. These 2 positive items were partly offset by the category Other, which includes an increase in the capital requirement due to the shift to higher-yielding assets and the replacement of part of our swaps with government and corporate bonds with very long durations. In addition, the ratio was lowered by the impact of the UFR reduction from 3.75% to 3.60% as of the 1st of January this year as well as capital flows to shareholders in the form of the announced 2021 interim dividend and the EUR 250 million share buyback program that commenced in March. Please note that the expected impact on the solvency ratio from the recently announced acquisitions of MetLife and Heinenoord as well as the sale of the Bulgarian business will be reflected at the time the respective transactions close. Let's now turn to Slide 9, which shows the operating capital generation by segment. Total operating capital generation in the first half of 2021 increased to EUR 780 million compared with EUR 543 million in the same period of 2020, with most segments contributing to the increase. The main drivers of this significantly higher operating capital generation were the improved Non-life underwriting results in both P&C and D&A as well as the higher new sales at Insurance Europe. In addition, the contribution from banking in the first half of this year is based for the first time on the new methodology and reflects the statutory net result offset by a limited increase in risk-weighted assets. Let me just remind you that in previous years, the operating capital generation of banking was based on dividends remitted to the holding. The ongoing shift to higher-yielding assets as well as higher equity valuations led to a higher investment return, mainly at Netherlands Life. On the other hand, higher sales at Japan Life lead to new business strain, which has a negative impact on operating capital generation in the short term. A breakdown of operating capital generation by source can be found in the appendix to this presentation. The next slide shows the capital position at the holding. Let me begin, as usual, with Netherlands Life, which reported an operating result of EUR 520 million. The increase compared with the first half of 2020 -- sorry, I think I moved too fast within the presentation. So we are back to Slide 10, and we're talking on the cash capital position at the holding, which increased to EUR 1.5 billion at the end of June 2021 compared with EUR 1.2 billion at the end of December 2020. Total remittances received from subsidiaries reached EUR 978 million in the first half of 2021. While we saw the gradual resumption of dividend payments from some units, regulatory restrictions are still somewhat impacting remittances, mainly from NN Bank. As usual, details of all the remittances upstream by each segment can be found in the appendix to this presentation. Cash outflows in the first half of the year were the payment of the cash portion of the 2020 final dividend of EUR 252 million and the repurchase of own shares for an amount of EUR 165 million. The amounts to be paid for the announced acquisition of MetLife in Poland and Greece and Heinenoord in the Netherlands will be deducted from the cash capital position at the time that the transactions are closed. 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 in the first half of the year was up 21% compared with the same period in 2020, with almost all business units reporting higher results. Please note that the current period benefited from EUR 24 million of private equity dividends while the first half of 2020 including EUR 16 million of private equity dividends and nonrecurring benefits. I will take you through the results of the individual segments on the next slide. On the right-hand side, you can see, the net result for the first half of 2021 was EUR 1.4 billion increase compared with the first half of last year and is mainly driven by higher nonoperating items, which include capital gains on the sale of public equities and government bonds in the current period. The operating result by segment is shown in Slide 12. Let me begin, as usual, with Netherlands Life, which reported an operating result of EUR 520 million. The increase compared with the first half of 2020 is mainly driven by a higher investment margin in the current period as we continue to shift to higher-yielding assets as well as higher dividends from equity investments following the postponement of some dividend payments in the first half of last year due to COVID-19. The operating result of Netherlands Non-life increased to EUR 189 million from EUR 111 million in the first half of last year. The higher results in P&C were mainly driven by favorable claims development in the Fire portfolio also supported by frequency benefits due to COVID-19. In D&A, we saw favorable claims development in individual disability as well as a higher underwriting result in the accident and travel portfolio. The combined ratio improved to 92% versus 94.9% in the first half of 2020. This is a strong result. But please keep in mind that Non-life results can be volatile. And as David already mentioned, we will see the claims from the flooding in the Netherlands and Belgium coming through in the second half of the year. Insurance Europe's operating result increased to EUR 161 million. As COVID-19 restrictions are eased in many countries, the recovery in sales led to higher life and pension fees across the region. We also saw a recovery in sales of COLI products in Japan. The operating result of Japan Life was up 23% on the same period last year, excluding currency effects, reflecting a higher technical margin, lower DAC amortization and trail commissions and higher fees and premium-based revenues. Asset Management's operating result increased to EUR 91 million driven by higher fees on the back of higher average assets under management and a more favorable asset mix. The operating result of banking was broadly stable at EUR 79 million in the first half of 2021. Higher operating income, mainly reflecting fees earned on the larger service mortgage portfolio, was offset by higher total expenses. Finally, the operating result of the segment Other improved to minus EUR 76 million, mainly driven by the higher operating result of the reinsurance business, which last year included claims related to Netherlands Non-life's disability portfolio. And with that, I will now pass you back to David for the wrap-up.

Thank you, Delfin. We can look back at an excellent first half of 2021 with a strong financial and commercial performance at all of our business units. Operating capital generation increased 44%, and our solvency ratio remained strong at 209%. We have announced today that we will pay an interim dividend of EUR 0.93 per ordinary share in September, in line with our dividend policy. Even if COVID-19 continues to impact the lives of many and uncertainties continue, our employees remain dedicated to providing excellent products and services to our customers to help them care for what matters most to them. We are committed to delivering on our strategy to create long-term value for all stakeholders, and we are progressing well to achieve both our financial and our nonfinancial targets. And let me now hand you back to the operator to open the call for your questions.

[Operator Instructions] Our first question is from Mr. Andrew Baker of Citi.

So the first one is just on OCG. I was just wondering if you could provide the outlook for OCG for the second half based on where current market conditions are. And if you're not willing to provide that, maybe you could just provide the mark-to-market impact that you see in the second half from interest rates and mortgage [ rate ]? And then secondly, if you were to dispose the Asset Management business, just curious what would be your plans for any proceeds that you may receive.

Yes. Thank you, Andrew. Delfin, can you cover the first question? And I'll take the second one.

Certainly. Thanks. Andrew, thanks for your question. On the OCG outlook for the second half. First, let me remind you that, of course, OCG is more volatile than operating result as it is dependent, as you rightly point out, to the condition of the market, of the rates in particular. Nevertheless, of course, the first half of the year has been very good driven by many factors. So it certainly will be wrong to just use the first half of the year and multiply it by 2. There has been quite a few elements positive during the first half in several segments. For example, in Life, we mentioned the private equity dividends that are not expected to come in the second half of EUR 24 million. Non-life has had a very good result. And at a 92% combined ratio, we do expect things to evolve more within the range of our target of 94% to 96%. But also, Europe has had strong sales and benefited from strong market performance, providing some additional performance fees of pension business. Keep in mind that also, the bank has a good OCG contribution as the strong origination of mortgages, there was a significant transfer to third-party that impact positively in the operating results in the OCG. So overall, there is an elevated level in the first half that we don't expect to repeat it in the second half. On your question on the rates, when you look at the OCG in the first half, these are based more or less on the average monthly rate in that period. And when we look at the current level of interest rates, they are close to that average. So overall, the impact on the markets are expected to be limited. Of course, don't forget the impact of the flood in the second half.

Yes. Thank you, Delfin. Then your question on potential proceeds. Just as a reminder for everybody, what we have announced is we have announced a strategic review of our Asset Management business to see if we can accelerate the growth of this business by making it part of a larger platform. Options on the table are joint venture, a merger, a partial or a full divestment. Now this review is ongoing. And obviously, if we have news to share on that, we will do that immediately. So yes, in terms of then speculating on capital return, we have a very clear capital framework. And in the past, we have been disciplined around returning capital to shareholders. And all I can say in this stage is that we will remain also disciplined on returning capital to shareholders not only in the past but also going forward.

Our next question is from Mr. David Barma of Exane BNP Paribas.

The first one is just to come back on the operating capital generation. So I think you mentioned EUR 700 million as an underlying capital number for the first half versus the EUR 780 million reported. Can you just help bridge the two? Because from what you're saying, it seems like the gap is a bit bigger than that with the private equity dividend, there's very strong Non-life business and the European new business contribution. So that's the first question. And then secondly, on M&A and, more generally, on your appetite for Life portfolios. Can you talk a little bit about your appetite for, I'd say, more guaranteed books of business, especially following the MetLife transaction, where the portfolio differs quite a bit to what you are rumored to look at in the past? And then maybe -- sorry, just a last small one on NNIP. So just to check in the press release, I see you referred to growth mostly. And now you seem to mention all the options are still on the table. Is that still the case, just to confirm?

Thank you, David. So let me start with your question on M&A and NNIP, and then I'll give it to Delfin on the OCG question. Yes, let's start with M&A. Let's start with a comment in general. I mean we obviously have our hands full now with trying to close the transactions that we did and preparing the integration. Overall, our base case is organic growth, and that's why we're also pleased to see the progress that we're making in driving long-term capital generation that is really driven by our businesses, whether this is the Non-life improvements that we have seen or, for example, the commercial growth where we have been doubling our value of new business or the mortgage growth. And that is our base case. Also, we'll continue to do active portfolio management. And the divestment of Bulgaria is an example of that and the strategic review that we're doing on NNIP. So currently, the priority is really around preparing and running the integration of our acquisitions. And we also, going forward, will remain disciplined on M&A. I think specifically on your question on MetLife, I think MetLife had a very good overlap of business with our businesses. And that helps in many ways. It helps, obviously, to create more synergies on the expense side, on the product side, but it also helps on the distribution side that you can easier align distribution channels and create a larger platform for growth. And that's why we were very interested in the MetLife business both in Greece and in Poland, and it will support our growth profile in these markets also going forward and thereby also supporting our operating capital generation and the EUR 50 million that we have given as a guidance on the back of this deal. Overall, it provides a double-digit return. So we're very pleased with the transaction and are now working to close it and prepare the integration. For NNIP, I'm not exactly sure what your question are. Indeed, all options are still on the table. If we look at the underlying performance of NNIP itself, it had a very good half year. We saw an inflow of third-party business -- or a net inflow of third-party business of EUR 3.9 billion, which is, of course, very good news. But also the performance was very strong. We've seen an increase of our outperformance versus the benchmark at now 162 basis points, which is very good news, and 70% of our alpha funds are now outperforming peers. So for us, it's really a combination of good customer inflow but also strong investment performance. And thirdly, the ESG angle. The sustainable and impacting investments of NNIP have always been a priority, and we see that also coming through in the portfolio where there's a good growth also in that asset category. So overall, NNIP had a good half year.

And David, then on your first question, I always have a bit of a struggle to define what is normalized run rate or underlying. The truth is that the OCG in the first half of the year don't have, let's say, many sort of one-offs. It is supported by a strong underlying business driver. So the only thing is that these drivers were very strong. And in terms of guidance or expectations going forward, we do believe that it is not prudent to use that same figure for the first half for the rest. I mentioned before the private equity dividends, which actually is a one-off that we have indicated impacting operating results. But that actually is not a special item within the OCG. As for operating capital generation, we do consider the expected return on equity. And the actual performance, overperformance or underperformance, is reflected in the market movement. But with that clarification, I think the areas where we see that has been very strong in the first half and might be less so going forward are related to the Non-life combined ratio, as I mentioned before. The level of strong sales in Europe, we think that they can be maintained. But some of the outperformance fees for the pension business, it depends on maintaining a strong market performance and can be a bit less strong. So overall, when you look at, as you know, the overall expectations for the second half, certainly, it will be lower and probably closer to the EUR 700 million that you mentioned but with no specific one-off to mention. Maybe, of course, this raises questions in relationship to the target for 2023, on which, apart from the positive momentum that we have seen across the different businesses, we see, therefore, some upside on this segment targets. But also, we have to take into account the expected contribution from the acquisition of MetLife Poland and Greece and also Heinenoord in the Non-life segment. So overall, just the 2 acquisitions together might bring something between EUR 70 million, EUR 75 million for 2023, apart from the positive momentum there.

Next question is from Mr. Ashik Musaddi of JPMorgan.

Just a couple of questions I have, if I may. So to stick with this OCG, sorry to come back on this OCG. So if I hear you correctly, you were saying like second half EUR 700 million is more normalized. So if I do times to EUR 700 million, it looks like your normalized OCG at the moment is about EUR 1.4 billion. And you said that a couple of acquisitions would add about EUR 70 million, EUR 75 million. So that basically takes you to about EUR 1.5 billion -- just shy of EUR 1.5 billion. And then there are dynamics of lower UFR in the future, some more underlying improvement in your P&C business, some growth in Asset Management, et cetera. So I mean, how do we think about like EUR 1.5 billion? Are we talking about EUR 1.6 billion, EUR 1.7 billion? Any color on that would be very helpful. That's the first one. Secondly, I mean, David, just wanted to say thanks that your capital management has been absolutely very spot-on with respect to dividend, buyback, et cetera. But if your capital generation OCG is moving higher and remittance is moving higher, then how do we think about the buyback? What needs to happen for you to say that, okay, instead of EUR 250 million, now I'm doing EUR 500 million buyback? So that is one thing I would like to understand is when do we get a higher buyback. Clearly, M&A is good as well. It is adding value. But any color on that. And thirdly, on Asset Management. Now if I understand correctly, I mean, you delivered like EUR 90 million profits in first half. That's EUR 180 million for the year without any growth. Post tax is EUR 140 million. I mean is that the right way to look at the math on Asset Management earnings? Because the speculated EUR 1.4 billion then looks relatively low for a business that is making EUR 140 million and is generating cash on a recurring basis.

Yes. Thank you, Ashik. Delfin, can you start with the OCG question?

Yes. So thank you, Ashik. You're right. I think there is certainly, clearly, upside to the EUR 1.5 billion target for 2023. I don't think it's now the time in order to set new targets. But apart from acquisitions that we have mentioned, there are some positive underlying drivers within the different business and the rerisking, we are also progressing quite well. In terms of the cap, how to think about the share buyback. I mean, certainly, we have been very clear and actually, we have acted with the same clarity in terms of delivering returns to shareholders with surplus capital. When we have excess capital, it's part of our capital management policy and we will do so going forward. We have a range for cash capital between EUR 1.5 billion and -- between EUR 0.5 billion and EUR 1.5 billion. So any excess above that, we will, over time, try to come -- bring it back to that level. Of course, there are some acquisitions that we are expecting to close in the case of Heinenoord before year-end and in the case of MetLife in the first half of next year. So this will be some cash outflows. And we will continue to be acting in that same manner.

Yes. And then on your question on Asset Management. I mean the way we look at the Asset Management business, as you know, Ashik, we really look from an operating capital generation point of view. So the operating capital generation in -- for the Asset Management in the first half was EUR 67 million. We've given an OCG target for the NNIP business of EUR 125 million in 2023. And well, as you can see from the results, that we're well on our way to deliver on that EUR 125 million OCG target.

Our next question is from Mr. Michael Huttner of Berenberg.

Congratulations on amazing results. Just 2 questions, if I may. The first one is, could you possibly give us a kind of walk-through what could be the cash at the year-end? I derived at a figure, but I forgot that some of the deals closed after the year-end. I'm completely confused now, so any kind of help on how we can -- using kind of -- because some of the subsidiaries do remit quarterly and some don't, and maybe the bank will do a catch-up. And I got confused with all this. So that will be really gratefully received. And then the second is on the strategic review of the Asset Management. Can you help us a little bit on this? So the business is doing fantastic. You do not need the cash. You don't seem to have tail risk like some of your competitors. I don't get it. I still don't understand what prompted you to review something, which you had firmly embedded in your strategic plan for 2023. Clearly, I'm missing something. It's not -- you're a very sensible company, so you've thought this through. Any help on explaining why it makes sense would be gratefully received.