Aegon N.V.
Q4 2020 Earnings Call Transcript

Published: 12 Feb 2021

[Operator:]

Good day, and welcome to the Aegon Second Half Year 2020 Results Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Jan Willem. Please go ahead, sir.

[Jan Weidema:]

Thank you, Anna. Good morning, everyone, and thank you for joining this conference call on Aegon's Second Half Year 2020 Results. We would appreciate it if you could take a moment to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. With me today are Aegon's CEO, Lard Friese; and CFO, Matt Rider. Let me now hand over to Lard.

[Lard Friese:]

Thanks, Jan Willem, and good morning, everyone. Thank you for joining us on today's call. In my part of the presentation, I will take you through the financial and strategic highlights for the half year and look forward to our strategic priorities for the coming year. Matt Rider will then go through the details of the results and our capital position. I will conclude the presentation with a wrap-up. After which, we will open the call for the Q&A session.

[Matt Rider:]

Thank you, Lard. On the next several pages, I will take you through the highlights of our second half year 2020 results, our capital position. Let me start with IFRS underlying earnings on Slide 10. In the second half of 2020, our underlying earnings amounted to €1.029 billion, an increase of 7% compared to the same period last year. Earnings benefited from lower expenses in all units, partly as a result of our program to reduce addressable expenses. Furthermore, we benefited from lower expenses for travel, marketing and sales activities across the group due to the restrictions imposed as a result of the COVID-19 pandemic.

[Lard Friese:]

Thank you, Matt. And before I close off, let me reflect on yesterday's announcement, that the Supervisory Board will propose to the Annual General Meeting of Stockholders to reappoint Matt as our CFO. I am pleased that he will continue for another term, and I really look forward to executing our strategic plans together with him and the rest of the organization. Today's presentation shows that we are progressing well in this respect. We have significantly increased our strategic focus. The teams that we are establishing to manage our Financial Assets will continuously look for ways to maximize their value and opportunities to release capital, capital that we will reallocate to businesses with better growth opportunities. Our performance improvement program has had a good start, and we entered 2021 with momentum. Supported by a reduction of our addressable expenses, we have delivered an increase of 7% in our underlying earnings in the second half of 2020. By actively managing our balance sheet and reducing leverage, we have improved our financial strength and reduced the volatility of our capital position. This provides a strong foundation to deliver on our dividend objectives. I would now like to open the call for your questions. Operator, please open the Q&A session.

[Operator:]

We will now take our first question from Farooq Hanif from Crédit Suisse.

[Farooq Hanif:]

Just first question is on the operational capital generation, which is clearly well ahead of consensus. Can you give us some sort of sense of what operational variances are in that number? And just whether, for example, are we likely to see -- I mean, the 29 percentage point capital generation in the U.S., is that a good guide to the normalized capital generation in the business? That's question one. Question two, in terms of the modeling change that you've done in the Netherlands to reduce volatility, how does that change your risk appetite and growth appetite? So is this going to just make it easier for you to rerisk without seeing the volatility in that business?

[Lard Friese:]

Thanks, Farooq. Matt, can you please take those?

[Matt Rider:]

Sure. With respect to the normalized capital generation, really, if you look at it year over half year over half year in the -- when we speak mainly about the U.S. business, first half of the year, we had €230 million of normalized capital generation. Second half, we had €540 million. So basically, the operational variance here relate mainly to the mortality and morbidity experience. So in the first half of the year, we had serious mortality. In the second half of the year, mortality has been a little bit better, but offset by claims. So I think you really need to normalize this out. One thing to maybe keep in mind, normalized capital generation for the second half of the year in total for the group, this is after holding and funding expenses, was about €873 million. If you take away the holding and funding expenses or if you put them back in, I should say, that gets you to about €1 billion. And that's a normalized capital generation before the holding and funding. I just need to remind you of a couple of things that -- so next year, and again, relative to the Capital Markets Day, we figure that Central Europe and Stonebridge will reduce that number by about €100 million. And we also have, just a gentle reminder, that from next year, we're going to be removing the -- we're going to be removing the UFR impact on the Netherlands, and that's going to be about €200 million. But really, just the seasonality in our business reduces that. Let's say, that if you wanted to do a run rate based on the second half results, probably reduces it by more than €300 million. So you have to take those one -- those sort of onetime impacts into account. And it is an important question that you asked. With respect to the modeling change in the Netherlands, the other reason why we did it is to moderate the massive amount of sensitivity that we had to credit spreads within our solvency ratio. So if you look at those sensitivities in the back of the presentation, for anything that is credit related, you will see that those have massively declined. So it doesn't necessarily help us to rerisk. We will do that on an economic basis as, let's say, circumstances permit. Like we did in the second half of the year, we went €4 billion more in the corporate credit. But this is going to stabilize the ratio and basically put it in a position where it can pay a normal dividend over time. Now we will aggressively manage the capital position within the Netherlands through additional management actions, but this should stabilize the ratio and sort of calm it down.

[Farooq Hanif:]

And just one quick follow-up on the Dutch ratio. It's probably a third question actually. Sorry about that. But just the move to the lower LAC-DT, presumably, you weren't asked to do this, but you did it because you could. Is that right? Or I mean what was the driver of the reduction?

[Matt Rider:]

The driver was us. So what happened was the Dutch Central Bank, 2 days prior to the Capital Markets Day, had issued some guidance. It was not anything -- it was very -- it was industry-specific. It was nothing that was directly related to us. But what we saw is that they were giving some, let's say, best practice with respect to how you should treat the excess spreads in your calculation and the release of the risk margin. So we decided -- and also, I think importantly, is they gave the industry guidance to take into account adverse scenarios when you calculate that number. So we decided to do it ourselves to get it out of the way. And frankly, to make the LAC-DT in the future a bit more resilient because, again, now you're taking into account some adverse scenarios in your calculation. So it will make it more resilient in the future. Maybe one more important point on that one is that by reducing the LAC-DT, effectively, you're increasing the SCR. And over time, it's a stock and flow-type issue so will get the capital generation going.

[Operator:]

We will now take our next question from Robin van den Broek from Mediobanca.

[Robin van den Broek:]

Yes. My first question is a little bit about the bigger picture. I mean when you came out with your Capital Markets Day, when you reset the dividend last summer, I think there were a lot of uncertainties around mortality, macro, equity markets, whether they stand credit cycles. If I look at your results today, I mean, it's clear that high equity markets, and cost savings are already helping. And the new stimulus in the U.S., I guess, it makes sense to expect a better credit cycle on the back of that as well. So I'm just wondering how these things could resonate into your expected payout ratios? Because it seems that over the last year, you have significantly improved at least the capitalization -- the quality of the capitalization in the U.S. So I was just thinking about your overall remittance ratio in the plan. I mean you're working towards the 70s level 2023. Just wondering, should we be expecting any upside to that shorter term? I appreciate that you probably still want to stay cautious. And I've seen your reiteration of the muted dividend growth, but I'm just trying to tie the things together. So that's question one. Second question is on your Financial Assets and most specifically on TLB. I mean it feels there's a little bit of a change in narrative in your presentation today where before, I think you clearly had the intention to sell it. And now it feels like you're more leaning towards just managing it more efficiently. And in connection to that, can you maybe talk a little bit about which assets within Financial Assets would be more suitable for an actual disposal and which ones are not? I mean in the past, for example, you talked about maybe doing back book deals in the Netherlands. Maybe some more thinking around those potentials will be very helpful.

[Lard Friese:]

Yes. Robin, and thank you for your questions. So let me start by -- well, let's just take them one by one, with maybe the easiest one. So on -- we've said at the Capital Markets Day that our objective is to grow our dividends in line with the growth of the free cash flows to a level around €0.25 per share over the year 2023. We also said that we want to operate in the beginning of our journey at the higher end of our capital range to allow us financial flexibility to delever the company and to also have financial flexibility for some management actions that we may want to take around Financial Assets to be a book and the like. And obviously, we also need to bear in mind, we are still in the pandemic. We all hope it's behind us soon, obviously. But we're still in a pandemic environment, so we're also taking that environment into account. So we are -- we've got good momentum at the moment. We're working hard. We're having our nose down, and we'll keep our nose down to ensure that we focus us fully on the -- on the implementation of our granular operating plan that we have to improve the business. And as I said, on the Capital Markets Day, look, if any free cash that comes out over time and that is more than what we need for the fulfillment of our plans, it has a clear priority, which is that, as a priority, it goes back to stockholders. But at this point in time, I would say we're, of course, pleased with the progress that we're making, but it's a start of a journey, and we are fully focused at implementing our plans. That's number one. On TLB, we have said at the Capital Markets Day that we focus -- that we made choices and that we focus on 3 core markets, 3 growth markets, 1 global asset manager. And that all the other businesses and ventures, including TLB, in this case, are being run tight capital and with a bias to exit. Now what we've done is exactly that. So in the back end of last year, we have stopped the funding of Go Bear. We have -- we started to unwind the traditional distribution channel in India. At TLB, we've appointed new management, restructuring the cost base to ensure that they -- that we run them tight capital and that they focus on products with low capital intensity. And so we're doing exactly with those ventures and assets what we have explained at the Capital Markets Day with a bias to exit over time. Then thirdly, your point around Financial Assets. Financial Assets, we have classified in the U.S., the Financial Assets for especially the VA book with living benefits and guarantees and the Long-Term Care book. And when it comes to the Financial Assets with the variable annuity book, we have said that we are doing a lot of work, which has commenced, it's well under way, to ensure that we analyze how we potentially expand the dynamic hedge program that we have for the GMWDB book -- the GMWB book to the wider legacy block of VA. And that is, as Matt I think outlined earlier, for us, a very important first step to then subsequently see what -- in what ways we can extract capital and maximize the cash flows by reducing risk, make them less risky, by making them emerging earlier and faster or by making these cash flows bigger and more beneficial to us. So -- and we will look, of course, internal options. But also, if possible, we will also be open for external options there. Then the Long-Term Care book, which is the next piece of our Financial Assets in the U.S. We focus very much on improving the quality of that book. We have seen that our assumptions are tracking actuals well, as was, I think, explained during the presentation. We have -- we are launching a -- we've commenced to start for approval request for approving the quality of the business further through rate increases, and that is something that we will focus on there. For our Dutch financial asset, I think Matt has just explained how we're prioritizing the stability of the capital, turning it into a reliable, may I, forgive me the word, boring capital payer over time. And obviously, we will actively manage that under our ownership as these long-term cash flows and long-term liabilities are a nice funding -- internal funding vehicle, of course, as well. So that's what we focus on. And with that, I think I've taken all 3 questions. So thank you very much, Robin.

[Operator:]

We will now take our next question from Michael Huttner from Berenberg.

[Michael Huttner:]

Traditionally, yes, I always say, well done, but these are really good numbers. So I had 3 questions, but choose which ones you want to answer. So the first one is going back to Bermuda. Can you give us -- can you say -- I couldn't -- I didn't look for it, sorry, what -- how much money they made in 2020? And what could be kind of run rate? The second is on COVID. What should we expect in terms of impact for 2021? It sounded a little bit cautious saying we're still in the middle of the pandemic. But I thought that the positives are set, but I may be wrong. And then the last one is on kind of relating to the Financial Assets. I'm always optimistic you could sell off the U.S. VA book more quickly or reinsure it or something. These rising interest rates in the U.S., how beneficial are they to this kind of increased cash return, maybe other options, et cetera? I'm sorry, 3 questions, please choose if you don't want to answer them.

[Lard Friese:]

Thank you very much, Michael. Matt, think of the TLB question, what's earnings?

[Matt Rider:]

I think we can cover all 3 of them.

[Lard Friese:]

Okay, good. Please, go ahead. Go ahead.

[Matt Rider:]

That's fine. Maybe on the first -- just for the TLB business, we did €49 million before tax in 2020 on about €600 million of IFRS equity. With regard to the, let's say, COVID expectations for 2021, we are still quite cautious. We are expecting still to have, let's say, in the -- maybe in the first quarter -- enhanced claims in the first and second quarter. I would say in the first quarter, something like $100 million would be something reasonable. That would be based on an assumption of 200,000 total U.S. deaths. So something in that range. And then the important one also is on defaults and credit migration. And we're still expecting something for next year, something in the area of $300 million. Even though we've had very low impairments in 2020, we're still expecting that there could be knock-on impacts once we come out of COVID. So something in a $300 million range with, let's say, commensurate credit migration that you would see come through solvency. Now for the rest of the macro environment, obviously, very unclear. You've seen unprecedented levels of government support so far in 2021, which is making the credit losses very small, and equity markets are really almost surrealistically high at this point. So that's why we need to be a little bit cautious with respect to, let's say, dividend expectations and performance in 2021 because we don't know the knock-on consequences of COVID yet in the financial markets. Your third one was the U.S. VA book as a financial asset. What we need to do here is we need to implement a dynamic hedging program as Lard had outlined. And it's going to take some time to do the full evaluation of what the implications of that are. But a big thing and, let's say, our ability to put that dynamic hedging in place, and, let's say, the economics of it are going to be based on the interest rate levels at the time that we would execute that kind of thing. So right now, we've seen, I think in the first half of the year, we saw the 10-year treasury at 66 basis points. We ended the year at 93. I think today, we're somewhere in the 113 range, something like that. That is helping us. We're getting actually quite a big help in the economic value of these businesses, and that helps us to execute on the hedging. And again, we'll come back likely in the -- at our first half results and give you an update where we stand there.

[Operator:]

We will now take our next question from Steven Haywood, HSBC.

[Steven Haywood:]

I think you mentioned about the volatility in your separate account in the Dutch business and how this is impacting the solvency ratio. Can this volatility be addressed in the future? I assume that the internal model updates that have been done don't really address any kind of volatility, really, from this account. And then a second question, sticking with the Dutch business again. There was mention about the remittances also came from the Mortgage business in the second half of 2020. I'm just wondering how this aligns with the dividend ban from the ECB, assuming that the Mortgage business has a banking license?

[Matt Rider:]

Let me pick up the first one. So what we had signaled was, if you think about the -- we ended up at 159% on the Dutch life solvency ratio. And that was probably lower by maybe 10 percentage points than what people had been thinking about. Six percentage points of that related to the reduction in the LAC-DT, the worst-case tax factor for that one. The remaining 4% really came from volatility in that separate account of LAC with guarantees. And indeed, there are some things that we can work with from a management standpoint and some things that are going to be difficult to do. But the idea here is that most of it can be dealt with through management actions. That's one of the things that when we say that we are going to have dedicated teams working on the Financial Assets books, this is one area that a dedicated team is going to really be digging into in terms of finding the management actions. With respect to the remittances from the mortgage company, no, this has no impact. We have freedom within the group to be able to pay dividends, and that's why we took, I think it was 47 million dividend out of the mortgage company in the second half of the year.

[Operator:]

We will now take our next question from Fulin Liang from Morgan Stanley.

[Fulin Liang:]

So I have 3 questions. The first one is just to -- just a bit of clarification. The $300 million LTC pricing program, is that something new? Or is it just implementing the remaining pricing? And did you say also that you kind of change your regulatory assumption to reflect this program? So this is like out because you normally do the assumption review in the second half -- sorry, in the second quarter of the year, so this is out-cycle stuff. Is that right? So that's the first question. And the second question is also a bit of clarification. So the way you implement, you reduce the volatility to the spread movement. If I interpret the whole thing correctly is you bring your portfolio more in line with reference portfolio. Does that mean actually you lower the allocation to government bonds, increase allocation to credit assets and probably also slightly lower the allocation to Dutch mortgages? Is that -- is that the interpretation correct? And if that's the case, what's the impact to your incremental normalized capital generation? Because presumably, this new portfolio would have a higher yield. So that's the second one. The last one -- sorry, my question is a bit long. The last one is just in terms of the outlook of your remittance from Netherlands, given your solvency is already approaching the kind of 150% level, and also you -- we will have a drag from lower UFR. We will have potentially some drag to prepare for the long-term guarantee review changes in maybe 2 or 3 years' time. Does that mean that the outlook from the Netherlands remittance will be kind of low in the next 2 years?

[Lard Friese:]

So, Matt?

[Matt Rider:]

Okay. So thanks, Fulin, for your very detailed questions there. So let me first clarify the $300 million in rate reductions. Back in 2016, Transamerica had implemented a rate increase program, and we took credit for that for about $1.1 billion in our reserving and premium deficiency reserve testing. Of that $1.1 billion, we have currently executed on that with state regulators, $1 billion of that. There's still some outstanding, leaving that $100 million stub. So when we say the $300 million, it's effectively, we're rolling in those states that had not approved the previous rate increases for $100 million. And then we have an additional rate increase program that we are reflecting in our -- in this case, our premium deficiency reserve testing of $200 million. So the total between the stub of what was left over from 2016 and what we're now doing is about $300 million. Now that's not an assumption change. This is actually a management action. And what we do is when we do a management action, and we have been very good at getting these things approved in the local state insurance departments, we are able to bake those into our premium deficiency reserve testing or reserving or those kind of things, much like we would be able to bake in management actions on expense assumption changes that we do and like we saw in both the Netherlands and in the U.K. So what we're seeing here is the management actions are in place. We're ready to file, ready to go. And it's going to take some time to get those. And obviously, we haircut what we think we can get -- from what we think we can get in putting in the provisions, so we'll put it in at a conservative level. Your next question with regard to the changes that we've made to our internal model to reduce the volatility of the Dutch solvency ratio. And the important thing here to remember is that this is really a move within the SCR. It's within the SCR. So what we're doing is we have -- there's basically a change that we have made, which allows that, let's say, the SCR to move more in line with our own asset portfolio. So it does not require like massive portfolio changes. Now yes, we did invest more in corporate credit opportunistically in the first half of the year, €4 billion. We might bring down the mortgages just a little bit, but there are not going to be any material impacts in terms of the, let's say, the capital generation ability of that business, other than to the extent that you have a higher SCR, then it gets more of a capital release over time. I think that's it.

[Fulin Liang:]

Yes. The second -- the last question is about the outlook of Netherlands because of the solvency?

[Matt Rider:]

Yes. Apologies. So yes, we do want to maintain a cautious stance with respect to their regular dividend, and we do have to take into account the outlook. So we are going to have UFR drags for the next 3 years. The EIOPA review is, I think, probably the earliest that, that thing could be even enacted would be 2024. So that's sort of even beyond our own, what you would say, our planning horizon and what we put out for target. So that's not much of a big deal for us. And also, we've looked at least the EIOPA advice, it looks like it has about a neutral impact on the Dutch solvency if you looked at it today at today's current interest rate level, so that's not so much of a concern. But the idea is that, that Dutch life business is a financial asset. And we're going to run it as such, which means try to get as much capital as we can over time, increase the net present value proceeds to the group.

[Operator:]

We'll now take our next question from Ashik Musaddi from JPMorgan.

[Ashik Musaddi:]

Yes. Lard, Matt, I just have a couple of questions. So first of all is going on your Financial Assets. Sorry to be a bit pushing on this. I know that you have a clear strategy that you want to run those for value with the bias for exit at some point. But at the same time, I think what, Matt, you suggested is that interest rates are going up, which are helping the economic value of these assets. So can you give some clarity as to how long will you wait for interest rates to go up to see more value out of these assets? I mean or would you say that what matters is how much you are getting it today? And then -- and that's what you will take a call rather than just keep waiting for interest rate in U.S. to go higher? So that's the first question. The second one I would ask would be like capital generation. Just to get a bit of clarity, if I understood correctly, what you mentioned was €800 million was the second half capital generation. Then we need to take away €300 million for this Central, Eastern Europe Stonebridge and lower UFR impact, so that's €500 million. Should we like do x2 of that and that's what the normalized capital generation is €1 billion, a normal run rate? Or am I missing anything on this, would be great.

[Lard Friese:]

Thanks, Ashik. Matt, you take both?

[Matt Rider:]

Okay. So on the Financial Assets, are we waiting for interest rates to go up to take action? No, we're simply not. Now, we're benefiting from higher interest rates now. And clearly, the higher interest rates go -- at the moment that we would put on a dynamic hedge that would include interest rates, we would get a benefit at higher levels of interest rates. But we're not waiting. The plan here is to implement a dynamic hedging program. We need some time to evaluate the circumstances. But what you're really seeing here is the fact that the economic value of that block really is sensitive to interest rates. And we need to know what the implications of that are in order to put the dynamic hedging program in place and then ultimately, to do something with the block. And again, we're benefiting now from higher rates, but we're not waiting for them to go up. That's not the point. We're going to take management actions with regards to this. With respect to the normalized capital generation, yes, I would start with that. I would -- again, I'm probably going to ask you to go back to IR and walk you through this in granular detail. But again, we did -- for the second half of the year, we did about €870 million of normalized capital generation after holding and funding expenses. And you do have to take away -- you do have to take away the effects of Stonebridge and CEE, which is about €100 million. You got to take away the UFR impact, €200 million. There's some seasonality in there. So we get much better capital generation in the second half of the year from the U.S. than we did in the first, maybe €300 million. And that gets you, I think, to more of a normalized number, if you can just -- if you annualize that.

[Operator:]

We will now take our next question from Andrew Baker from Citi.

[Andrew Baker:]

Great. So just 2, please. The first one, Matt, on the $100 million you mentioned earlier, for Q1 mortality. Can I just clarify, is that what you're saying is excess mortality claims? Or is that net of the favorable morbidity that you expect? And then just secondly, on the VA book. If you were to explore third-party solutions for this, do you see it as a single book, so the GMWB and the GMIB/DB book? Or could you potentially look for solutions for those 2 as separate books?

[Matt Rider:]

So on the first one, the excess mortality, let's say, in the first quarter would be the gross earnings impact. And it only relates to mortality. It would not reflect any, let's say, benefit from morbidity. But we're -- we don't know what morbidity is going to do. We're just signaling the fact that, that's what we're thinking in terms of excess mortality for COVID. With respect to the VA book, yes, I mean, again, first step is to dynamically hedge it. And second, we can look at options. So you can do the whole book. You could do parts of it, slices, vertical slices, frankly, lots of different options there. But again, we can take this a little bit in sequential order and worry about the hedging up first.

[Andrew Baker:]

Sorry, Matt. Just one follow-up there. But if you were to look at it in slices, why would you need to wait for the dynamic hedge for the GMWB book if you were to look at that separately?

[Matt Rider:]

I'll give you a quick example. You see the economic value of that book that is changing quite a lot due to levels of interest rates. So let's say, you got into a transaction situation today, and you're not dynamically hedged, and interest rates go up 50 basis points or go down 50 basis points. The purchase price would be just whipsawing all over the place. So step one, get it in a position so that an external buyer would be willing to take it on, and any external buyer is going to dynamically hedge.

[Operator:]

We will now turn the call back to your host.

[Jan Weidema:]

Thank you, everyone. This concludes Aegon's Second Half Year 2020 Results Call. Thank you for your interest, and goodbye.