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 2025 Results. [Operator Instructions] Before handing this conference 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 statements. 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 or an offer to buy any securities. Reference is made to the legal information on the last page of the presentation. Good morning, Mr. Knibbe. Over to you.

Yes. Thank you, [ Sharon ] and good morning, everyone. Thank you for joining our conference call to discuss NN Group's performance for the first half year of 2025. I'm excited to be here today. And with me are Annemiek Melick, our Chief Financial Officer; and Wilbert Ouburg, our Chief Risk Officer. I'll begin with an overview of the key messages and then dive into the excellent commercial momentum we have witnessed in our growth segments. Next, Annemiek will give a detailed analysis of the strong progression of our capital position and our record financial performance over the first half of 2025. After my concluding remarks, we will move over to Q&A. I see the strong set of results we present today as a great start towards delivering the growth targets we set at the CMD, which once more underpin our attractive investor proposition with compounding returns for shareholders. Annemiek will further elaborate on our capital position and a strong set of OCG results, but I will give you the headlines. Our pro forma group Solvency II ratio progressed strongly from 195% per the end of April to 205% per the end of June or 208% on a reported basis. And this is now above our comfort range of 150% to 200%. Netherlands Life Solvency II ratio shows a similar trajectory and came in at 200%. For operating capital generation, for the very first time, we report more than EUR 1 billion over a semiannual period. As you remember, at our recent Capital Markets Day, we set ambitious growth targets, supported mainly by Europe, Netherlands Non-life and Japan. I'm particularly pleased about the commercial success these growth segments have shown in the first half of 2025. The value of new business in Europe and Japan increased with 11% and 25%, respectively. In the Netherlands, Non-life gross written premium grew by 6%. Let's dive into the underlying drivers of our financials. As you know, we have a multi-stakeholder approach. Our objective is to achieve customer satisfaction scores significantly above the market average and secure a position among the top 3 for broker satisfaction in 2028. Customer satisfaction has shown consistent improvement, especially in Europe, where every single unit is above market average in terms of customer satisfaction. This is the first time we earned this great achievement, which will support our growth, both from retention and new business perspective. Additionally, our Dutch broker satisfaction score indicate that we are overall ranked #1. Our goal is to maintain an employee engagement above benchmark levels while we aim for over 40% women in senior management by 2028. We aim to cut greenhouse gas emissions by 45% by 2030, invest over EUR 13 billion in climate solutions and support 2.5 million people's well-being by 2028. As you can see, progress on all these targets is well on track. Our investor proposition remains attractive, and we're well positioned to continue delivering value to our shareholders. I already gave the headlines on capital and financial performance. I do want to highlight the Future Ready program that we introduced during our recent Capital Markets Day. This strategic program focuses on standardization, automation and the implementation of AI to enhance customer experience, to promote growth and deliver around EUR 200 million in annual benefits by 2027. As such, the program is an important cornerstone in our investment case, and we are demonstrating significant progress. Let me give 2 examples. We are making significant progress towards our goal of generating 50% of APE from digital leads by 2028, having reached 40% in H1 '25, up from 36% in 2024. This growth is driven by our digital marketing initiatives, including the successful launch of the agent digital office in Poland, which helps agents build an online presence and use digital tools. And this initiative will be expanded to all units with tied agent networks. Secondly, we're also focusing on collaboration and standardization to create scalable, reusable AI solutions. Currently, 191 AI use cases are in production, up from 148 year-end '24, with all business units reporting strong progress. One example is our secure internal platform for generative AI, which allows our teams to build AI-powered chatbots using internal knowledge. This platform is already in use across multiple Dutch and international units. Another important cornerstone in our investment case is our capital return promise with an attractive progressive dividend per share, complemented by annual share buybacks. Today, we announced an 8% increase of our interim dividend. And with a group Solvency II ratio now above the 150% to 200% comfort range, we are well positioned to look for upside to our capital return promise at the full year '25 stage with a focus on small incremental steps. Our delivery on capital return since the IPO is impressive with over EUR 10 billion of capital return to shareholders. And we remain committed to continue this road map with total capital return to shareholders foreseen to grow to EUR 15 billion by 2028. As a first step, today, we announced EUR 1.38 per share interim dividend, in line with our dividend policy. Before I highlight the commercial success we have seen during the first half year, I'd like to remind you of the ambitious targets we set at our Capital Markets Day back in May. OCG is expected to reach EUR 2.2 billion in 2028, while free cash flow should exceed EUR 1.8 billion. Most of the growth versus our 2025 target is coming from Insurance Europe, Netherlands non-life and Japan. As such, I'm very pleased that the 3 units are delivering very strong commercial results. Allow me to elaborate. Insurance Europe, bolstered by our leading positions is our largest growth segment with a target of EUR 600 million in 2028. We are active in 8 countries where we have organically built our business since the 80s and 90s, becoming a top player or #1 in markets like Greece, Romania and Hungary for life insurance and for example, Poland and Romania for pensions. Our strategy focused on high-margin, capital-light protection products, and we are well positioned to capitalize on the underpenetrated high-growth margin in the region. However, the underpenetration does not matter if you do not have the distribution to tap into this need. And our multi-distribution network is what sets us apart from the competition. In the first half, we saw strong VNB growth of 11%, driven by both better sales and margins, and this will translate into OCG growth over time. OCG grew by 10% in the first half of 2025 outpacing the 7% CAGR implied in our target versus '24. OCG came in at EUR 251 million, not that dissimilar to our achievement in 2020 with the important difference that we now deliver this in 6 months. Netherlands Non-life is our second largest growth segment with an OCG target of EUR 475 million in 2028. Also here, we witnessed solid commercial momentum supported by strong customer and broker satisfaction. Gross written premiums are up 6% year-on-year to EUR 2.6 billion, driven both by indexation and volume growth. Growth primarily came from the SME, direct and bank channels with fire and sickness insurance showing the highest increases. OCG came in at EUR 175 million in the first half of 2025, up 14% versus last year. Netherlands Non-Life strong performance is also highlighted by its combined ratio of 91.2% over the first half of '25, at the lower end of the 91% to 93% target range. This marks a 1 percent point improvement compared to the first half of '24, mainly driven by lower expenses. The Future Ready program in Non-life is paying off in efficiency improvements. Japan is the third growth segment with an OCG target of 2028 of EUR 160 million. In Japan, we see strong signs of sales recovery with a 25% increase in new business value in the first half of '25. This was mainly driven by our long-term savings product and higher rates, driving better margin for cash value insurance sales. Our new long-term savings product has already taken a 17% share of VNB over the first half of '25, and we expect this to further increase over time. The new long-term savings product was only launched in March. If we focus on the comparable VNB solely for the second quarter, VNB growth would be more spectacular at 56%. So Japan is making strong progress on regaining a top 3 market position now that we have been able to improve our level playing field with the introduction of our first new product in the attractive long-term savings market, and there's more to come. Now I will hand over to Annemiek, who will further provide details on our financial performance for the first half year of 2025.

Thank you, David. On my behalf, a warm welcome to everyone. Let's start with the key financials on Slide 12. Our OCG is up 6% and exceeded the EUR 1 billion for the first time for a biannual period. It's a strong print and confirmation we're on the right track to deliver our 2028 target. Free cash flow is down 4% versus last year, mainly driven by a positive one-off last year versus future ready investments this year. It's a metric you really have to look at on an annual basis, and we're very confident to achieve our free cash flow target of EUR 1.6 billion for 2025 and remain on track to meet the 2028 target of exceeding EUR 1.8 billion. Our pro forma solvency ratio came in at 205%, which is above our 150% to 200% comfort zone. Our cash capital position shows an increase from EUR 1.3 billion to EUR 1.6 billion, driven by the untendered R Tier 1 capital and some net cash build during the period. Now let me give you some insights into our strong capital progression. Looking at the capital bridge for the first half of '25, operating capital generation of EUR 1 billion added 12 percentage points to the solvency ratio, which is 4% higher than the capital flows to shareholders. Market variance added 5 percentage points, largely driven by the positive impact of interest rate movements and decreasing spreads on government bonds and mortgages, partly offset by negative equity variance. Mortgage spreads at the end of June are some 10 basis points tighter than our through-the-cycle expectation. If this were to normalize, it would cost circa 2 percentage points at group level. The bucket Other added 3 percentage points to the ratio, where the positive effects from the implementation of Basel IV and the new longevity deal were partially offset by model and assumption changes. The solvency ratio of Netherlands Life increased as well, up from 187% at full year '24 to 200% at H1 '25. As indicated at our Capital Markets Day, the natural moment for us to consider stepping up our capital return policy is at the full year results. Given our position now, the outlook is promising. As you know, we prefer small incremental steps in our structural capital return promise over lumpy buybacks. We continue to have a conservative asset portfolio. And given that most of you are on holiday or trying to crack your bags, I will not dwell on it this time, but you can find all the usual information on our very safe Dutch mortgage book, et cetera, in the appendix of the analyst presentation. I would like to separately mention though, that our key Solvency II ratio sensitivities on equity, real estate and mortgage spread shocks all decreased compared to the end of '24 as we benefited from increased eligibility of own funds, driven by lower net deferred tax assets. Now let's move to OCG. Asset, a strong print in OCG, up 6% on a not-so-easy comparable base last year. This growth reflects continued strong underlying business performance and growth in Insurance Europe and Netherlands Non-life, flattered by positive experience in Netherlands Life. In the Netherlands Life segment, we witnessed a significant OCG increase due to favorable experience. Last year was negative, now it was positive and higher investment returns. Also, new business is seasonally elevated in the first quarter and still benefits from DB sales, which will taper off as the pension reform further effectuates. Netherlands Non-life came in at EUR 175 million, up 15% versus H1 last year despite a refinement in business recognition, shifting some OCG towards the second half of the year. Similar to last year, Non-life OCG benefited from benign weather, whereas this year, we did not see the elevated fire claims that we saw last year. On the back of this benign weather, we would expect Non-life to deliver an OCG of more than EUR 400 million this year. Europe's increase by 10% OCG is driven by business growth, as David already alluded to, improved persistency and increased investment results. For Japan Life, the underlying APE and VNB trends are very promising, as David just explained. OCG is down 10% versus last year, however, mainly due to normalizing technical results and a higher new business strain due to the strong sales recovery. In Banking, further NIM compression in H1 '25, although partially offset by expense reductions, negatively impacted OCG. We expect NIM pressure to extend to the second half of the year. The first half of '25 furthermore included a one-off release of required capital related to a change in collateral recognition. Lastly, the segment Other showed some normalization compared to the first half of '24, but NN Re still benefited from positive experience. Now with the strong H1 '25 OCG results, we do see upside to our previous full year guidance of flattish OCG versus full year '24. However, we would expect OCG for the second half of '25 to be slightly lower than the first half as positive one-offs in Netherlands Life and continued NIM pressure on NN Bank are expected to be mostly but not entirely offset by higher OCG from Netherlands Non-life due to the seasonality of new business. Before we go to free cash flow, let me say a few words on our IFRS results. As you know, we steer on OCG, where at the Capital Markets Day, we've again outlined ambitious growth targets. Under IFRS, the most important driver for future growth is the organic CSM as this feeds to future profit margin. Therefore, I'm happy to see organic CSM growth of 2% over the first half of '25, where Japan became a neutral contributor instead of a drag, reflecting a sales recovery. Now similar to OCG, our IFRS operating result increased as well, largely due to a higher investment result at Netherlands Life. This was mainly driven by higher returns from investment from private debt investments and a more technical accounting asymmetry relating to a portion of our derivatives falling outside of hedge accounting. NN Group's net result decreased due to bond sales, revaluations on derivatives used for hedging purposes and the final accounting results from the sale of Turkey, which in itself had a negligible capital impact. Lastly, let's move to our capital position. Free cash flow came in at EUR 863 million in the first half of '25, 4% lower than the comparable period last year. This is mainly due to the segment Other, where last year benefited from a tax-related one-off, whereas the current period includes future-ready investments. Remittances were actually up 2% year-on-year, where lower contributions from Netherlands Non-life and NN Re were more than offset by higher contributions from Insurance Europe and the bank. At the full year results, we already indicated that the bank's remittance capacity strengthened significantly due to the implementation of Basel IV for the 1st of January in '25, which we are using to complement remittances this year and the first half of next year. In addition to the Dutch units, we still expect remittances from Insurance Europe and NN Re in the second half of the year. As such, we're very confident to achieve the EUR 1.6 billion free cash flow target for '25. The change in our debt and loans reflects the impact of the untendered grandfathered RT1 notes with a call date in January '26. And our capital flows include the payment of the final dividend over '24 and a part of the EUR 300 million buyback that has been executed as per the end of June. That concludes the financial explanations. And with this, I would like to hand it back over to David for concluding remarks.

Yes. Thanks, Annemiek. To wrap up our presentation, the group Solvency II ratio improved from 195% at the end of April to 205% at the end of June, surpassing the 150% to 200% comfort zone. Netherlands Life also increased to 200%. Operating capital generation exceeded EUR 1 billion for the first time over a semiannual period. Our growth segments in Europe, Japan and Non-life showed strong commercial success with the value of new business increasing 11% in Europe and 25% in Japan and the Non-life premiums in the Netherlands growing by 6%. Bottom line, we presented another set of strong results today, and this marks a strong start towards delivering the growth targets we set at the CMD, which once more underpin our attractive investor proposition with compounding returns for shareholders. And with these remarks, I would like to open up the call for Q&A. Operator?

[Operator Instructions] And your first question today comes from the line of Andrew Baker from Goldman Sachs.

The first one, just on Netherlands Life OCG, you mentioned some assumption changes. What specifically did you change there? And I guess, what was the impact in the first half? And then were these assumption changes considered as part of your 2028 target? And then secondly, just on the longevity transaction, I believe this was for EUR 4 billion of liabilities, but correct me if I'm wrong there. Just curious how you arrived at this number and then also how much capital generation you gave up as a result of the transaction?

Yes. Thank you, Andrew. Annemiek?

To start with your question on the longevity transaction, we did a transaction of EUR 4 billion of liabilities. It continues to be a very attractive market. I think the OCG impact will be less than EUR 10 million of that. And that also means given that we indicated last year that we roughly would build up EUR 10 billion of liabilities in a period of 3 years, we would still expect to have roughly EUR 6 billion available and a buildup of 2 to 3 years. And your first question was related to the assumption changes in life or non-life?

Life.

And life. Yes, we made some changes. They were indeed part of the target that we have actually given. And it basically is upping both on real estate and on equity, the assumptions with 50 bps. So in terms of public equity, we had an old pretax figure of 5.7% and the new return would be 6.2% pretax, which is roughly similar as post-tax given that we have quite some tax-exempt stakes there. On real estate, we were at 4.9% old pretax, that would go to 5.4% pretax.

Your next question comes from the line of David Barma from Bank of America.

Can you hear me?

Yes, we can hear you well.

Can you hear me?

Yes, David, we can hear you. I'm not sure you can hear us.

Okay. Great. So yes, just with a delay, sorry. So firstly, on Disability, please. The combined ratio keeps being quite a bit volatile and was a bit higher than I thought in 1H. Can you explain whether this is just the accounting noise under IFRS 17 that you've talked about before or if there's a worsening frequency here in 1H? And maybe if you can talk about the sort of premium increases you're doing in Disability at the moment as well. And then secondly, on Japan, what would have been the OCG in Japan, assuming you were under the new solvency regime, please?

Yes. Thank you, David. Annemiek, on Japan?

On Japan, the OCG under the new regime, that's hard to assess. I think what we've said at the full year results, it will depend on what the sales levels will actually be in '26 when we transition to the new regime, and we would expect it to be a couple of tens of millions there then.

Yes, David, on Disability. Well, I think overall...

Sorry, can I just add to...

Go ahead.

Go ahead, David. David?

Yes. Sorry for the delay here. Yes, just adding to that Japan point. Maybe to put it another way, what's the translation between VNB growth and OCG? And then how long does it take to be fully recognized?

Well, at this point in time, it takes roughly 7 to 8 years to be recognized. But if we transition to the new ICS, then 85% of it will be recognized immediately and the remaining 50% will go over roughly 7 years or something.

David, let me take the question on this. I think we're all very curious now where you are given the long delay. So you must be in a really nice location. But on the disability of the combined ratio, I think overall, yes, there is some accounting noise in there. If we just look at underlying at the book, the majority of the book is sickness benefits. That is actually doing very well. We did do some premium increases, but overall, we're quite positive on this book. This is also what we flagged at the Capital Markets Day that within D&A, we expect growth in the D&A, but then in the sickness part, that also happened. It's about EUR 500 million out of the close to EUR 800 million that is in group income. The other part, the EUR 300 million is in the disability book. This is more the long tail. There, there's more concerns given the overall trend that we see in society and also some of the backlogs that are with the government. So we've been doing significant premium increases there, and we expect also that, that will continue to be needed to keep that book healthy. Overall, I think the D&A book is on a positive trend that we expect also going forward. And therefore, we continue to say that 91% to 93% for the overall combined ratio for the total non-life business is the right way to look at this in terms of guidance.

And your next question comes from the line of Nasib Ahmed from UBS.

So first question on solvency reform. Any update on where that's going to land for you guys given the update on the Level 2 text? And then the second question on -- David, you kind of mentioned that there's more to come in Japan. Of course, you've got the improvement order lifted. And I think expectation is it takes a couple of years for you guys to start getting product approvals and distribution. But can you give us a sense of, yes, what is that more to come? You've got the long-term savings product, but what else can we expect from Japan?

Yes. Thank you, Nasib. Wilbert Ouburg, on the Solvency II reform?

Yes. Thank you, Nasib. So on Solvency II, Solvency II 2020 review is not coming in before January '27. We expect a broadly neutral outcome in relation to this review, where we are will be less dependent on management actions in order to achieve this outcome compared to before.