NN Group expects Solvency II uptick in Q2 as French risk fades

NN Group NV's Solvency II ratio, which dipped as yields on French bonds rose in the first quarter, will have improved over the second quarter following the conclusion of the French presidential elections, the insurer's chief risk officer, Jan-Hendrik Erasmus, told analysts May 18.

NN Group reported a pro forma Solvency II ratio including Delta Lloyd NV of approximately 180% at the end of the first quarter, indicating that it had 180% of the capital needed to withstand a so-called 1-in-200-year scenario. NN Group completed the acquisition of 93.3% of Delta Lloyd in April and expects the legal conclusion of the merger to take place Aug. 3. It will consolidate Delta Lloyd's results into its own from the second quarter.

For NN Group alone, the Solvency II ratio dropped to 238% at the end of March from 241% at the end of 2016. So-called market variance — primarily rises in yields on French debt in the run-up to the two rounds of voting April 23 and May 7 — knocked 9 percentage points off the figure, which was only partly offset by positive performances in equity and real estate investments.

Yields on benchmark 10-year French debt rose above 1% as far-right candidate Marine Le Pen reached a second-round run-off, but have fallen back in the aftermath of the victory of centrist Emmanuel Macron. The French 10-year yield stood at 0.835% as of May 17, a recovery Erasmus said will benefit NN Group's solvency position.

"If you look at what's happened since the end of the quarter, you will see the French [yields revert]," Erasmus said. "Net-net, we are slightly up. I wouldn't like to put a number on it at this point, but slightly positive."

CEO Lard Friese said NN Group was "comfortable" with the 180% Solvency II ratio reported for the combined entity, which includes the cost of the acquisition, estimates for aligning actuarial assumptions and restructuring costs. Delta Lloyd the same day reported a Solvency II ratio of 144% under a standard formula, within its own target range of 140% to 180%.

Rabobank analysts led by Claire McNicol said they "don't see cause for concern" in the 180% level, "but would hope to see solid capital generation in the coming periods."

NN Group booked a first-quarter net result attributable to shareholders of the parent of €435 million, up from €270 million in the same period in 2016, as the operating result grew in all of its business segments. The Dutch life segment reported a net result of €283 million for the period, up from €226 million in the first quarter of 2016.

CFO Delfin Rueda, meanwhile, said the company's expense reduction program "is well on track," with a further €14 million of savings in the Netherlands in the first quarter. The company's administrative expense base in the Netherlands, representing costs over the past 12 months, stood at €748 million as of the end of the first quarter, compared to €818 million at the end of the third quarter of 2015.

NN Group aims to lower the figure to €685 million by 2018.