Aegon Limited

Good day, and welcome to the AGON second half year 2018 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jan-Willem Wedema. Please go ahead, sir.

Thank you, sir. Good morning, everyone, and thank you for joining this conference call on AGON's second half 2018 results and medium-term targets. We would appreciate it if you take a moment to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. Our CFO, Matt Ryder, will walk you through the highlights of the second half of 2018 before handing it over to our CEO, Alex Rijnans, to provide an overview of our key strategic achievements and new medium-term targets. Given we are not only presenting our results, but also laying out new targets for this presentation, we'll be somewhat more extensive than usual. However, we will, of course, leave more than sufficient time for your questions at the end. I'll now hand it over to Matt. Good morning, everyone.

Thank you all for your continued interest in AGON and for joining us on today's call. Although this was a challenging and complex half year with many moving parts, we have achieved some very important milestones, which are shown on this slide. We have delivered on our €350 million expense savings targets. In addition, we have made strong progress on resolving the servicing issues related to the co-funds integration. I'm pleased to report that we have maintained our strong capital position and are reporting a 211% Solvency II ratio at the end of 2018, despite unfavorable market impacts. In addition, our holding excess cash position ended well within our target range at 1.3 billion euros, while we continue to manage our leverage ratio down. Normalized capital generation after holding expenses for the full year 2018 rose to 1.4 billion euros, which further supported increasing remittances from the operating units to the group. This leaves our dividend payments to shareholders well covered, as the full year end dividend will increase by 2 cents to 29 euros cent per share. Now I would like to take you through our financial results in a bit more detail, starting with our earnings. I'm now on slide three. During the second half of 2018, underlying earnings declined by 8% compared with the same period last year, despite the benefit from expense savings. Our ambitious expense savings program led to an uplift of 38 million euros compared with last year. Underlying earnings also benefited from business growth in Spain and Portugal, higher interest margins in the Netherlands, and continued growth of the UK platform business. However, the overall result was impacted by lower earnings from US retirement plans and adverse claims experience in the US. The lower earnings from US retirement plans were mainly driven by lower fee income from lower asset balances a lower investment margin, and investments in operations and technology to improve service levels and to drive growth. We plan to take further actions to improve future results, which I will discuss in more detail later in this presentation. The second half of 2017 included €62 million of favorable claims experience, which did not recur. In the current period, unfavorable claims experience of 14 million euros was driven by mortality experience in life and retirement plans, which was partly offset by favorable claims experience in accident and health. Overall claims experience in our long-term pair block of business continues to track in line with management's best estimate assumptions with an actual to expected claims ratio of 100% for the full year 2018. Now let's turn to the next slide on which I will provide you with the outcome of our expense savings program. As you can see, we have achieved annualized run rate expense savings of €355 million since we initiated the program in 2016 and therefore delivered on our €350 million target. Our U.S. operations achieved expense savings of $270 million over the last three years. A significant contributor to the U.S. savings was the partnership entered into with TCS earlier in 2018, which generated approximately one-third of the total benefit achieved. However, investments to improve service levels within retirement plans drove staffing levels and related expenses higher than planned. Furthermore, Transamerica made investments in operations and technology in the second half of 2018, to position the business to accelerate growth. At a group level, the slight shortfall in the U.S. was compensated by additional expense savings in the Netherlands. Digitization of the business, automation of processes, and efficiencies in the marketing and sales organization delivered 79 million euros run rate expense savings compared with the original 50 million targeted for the Netherlands. Expense savings at the holding totaled 19 million euros versus the target of 15 million. On the following slide, I would like to elaborate on the results of our U.S. retirement plans business. As you can see on the slide, second half underlying earnings in the U.S. retirement plans business decreased to $59 million compared with the same period last year. A substantial part of this decline is driven by a reallocation of expenses between product lines in the U.S., which we undertook earlier in 2018. This was done to better reflect the expense savings program, which has now been completed. Adjusting for this, the drivers for the decline in earnings were lower investment margin and net fee revenue in addition to investments in technology and one-time items. Lower investment margins and lower fee revenue were mainly driven by declining balances as a consequence of net outflows and a decline in equity markets. One-time items consist of several unrelated elements and adverse mortality experience. About half of the one-time items relate to timing issues between the first half and the second year half-year reporting periods. The remainder is made up of several smaller items. As I mentioned on the previous slide, the increase in expenses resulted from higher investments in operations and technology to further improve service levels to drive future growth. As mentioned at the Analyst and Investor Conference last December, there are several initiatives in place to accelerate growth within the retirement plans business. These include driving the placement and penetration of managed advice in new and existing defined contribution plans, as well as growing the share of revenue enhancing services. We are confident that the results for this block of business will improve as a result of these actions. On the following slide, I would like to walk you through our net income development for the last six months of the year. Net income amounted to 253 million euros, which is a decline of 83% versus the same period last year. This decrease was mainly the result of losses on fair value items and other charges, while income tax was a benefit. The loss from fair value items totaled €257 million in the last six months of 2018. Gains from fair value items in Europe, Asia, and the holding mainly resulted from hedging gains in addition to real estate revaluations in the Netherlands. These gains were more than offset by losses in the US, which came largely from the underperformance of alternative investments and the impact of market movements on hedging. The loss was higher than expected, partly due to lower than anticipated gains from our macro hedge. Other charges amounted to 581 million euros, which I will discuss in more detail on the next slide. Finally, income tax amounted to a benefit of 117 million Euro. This included one-time tax benefits of 84 million Euro as a result of reductions in both the US and Dutch corporate income tax rates, in addition to regular tax exempt income items and tax credits. I'm on slide seven. As mentioned on the previous slide, Other charges amounted to 581 million euro. We had flagged the majority of these in advance, including a 147 million euro provision related to the settlement of a class action lawsuit with U.S. Universal Life policyholders, a book loss on the early announced sale of the last substantial block of life reinsurance business, transition and conversion charges related to the TCS partnership in the U.S., and to the Atos Partnership in the UK. In addition, the UK had integration expenses related to co-funds and BlackRock's defined contribution business. Furthermore, other charges at the holding amounted to 36 million euro as we continue to prepare for IFRS 9 and 17. The main item we hadn't flagged was the outcome of model and assumption changes in the Netherlands of 138 million euro. These were mainly driven by adding a year of European mortality experience to our management best estimate for longevity and updating lapse assumptions in the individual life portfolio. On the next slide, I will give you more details on the macro hedge results in our U.S. business in the second half of 2018. Our macro hedge program is in place to protect regulatory capital in a down equity market scenario rather than being focused on IFRS. In case equity markets decline by 25%, the aim of the program is to limit the impact to the consolidated RBC ratio of the U.S. to 25 percentage points. If there wasn't a hedging program in place, such a scenario would lead to a drop of approximately Over the last two years, the hedging program performed in line with expectations and stated sensitivities as you can see from the table on the left-hand side of the slide. After switching to a full option-based program in 2017, the run rate costs have decreased significantly from $60 million to $45 million per quarter. What's more, actual results have tracked our sensitivities on average over the past two years. These sensitivities include the assumption of rising implied volatility in case of sharp market declines. The table on the right side of the slide shows that we typically see increases in implied volatility when equity markets decline sharply. However, in the market decline we witnessed in the last month of 2018, implied volatility did not increase. This led to a deviation from our expected hedge payoff of $96 million. We now turn to slide nine. In the first half of 2018, we mentioned that we established a program to address service issues associated with the co-fund's retail migration onto Agon technology earlier in 2018. I'm pleased that these measures have been effective, as you can see on this slide. As a result of the program, core trading and service levels have returned to target levels. Going forward, the focus for the retail service is to further improve its functionality and ease of use in addition to the nationwide migration, which we expect to take place in the first half of 2019. To date, Agon has realized 40 million pounds of annualized expense savings from integrating the co-funds business, a figure which will rise to 60 million pounds following the nationwide integration. Let's now move to capital on the next slide. As you can see on slide 10, our Group Solvency II ratio declined slightly to 211% in the second half of 2018. Growth in owned funds was driven by strong capital generation net of new business strain, which more than offset the approximately €300 million paid out for the interim 2018 dividend. An increase in our SCR by €400 million was mainly driven by unfavorable market variances. These were the result of declining equity markets in the U.S. and adverse credit spread movements in the Netherlands. Model and assumption changes had on balance a positive impact of six percentage points on the group solvency ratio. The implementation of a new dynamic volatility adjustment model in the Netherlands led to a lower SCR as we removed countercyclical elements from our model to align with IOPA guidance. This model change results in an increase in the one in 10 year combined sensitivities. And as a result, AGON is reviewing its capital target zones in the Netherlands. We are considering increasing the midpoint of the target zone by 5 to 10 percentage points. In line with our normal practice, we also updated actuarial and other assumptions in our European entities in the second half of 2018. In the Netherlands, this resulted in lower owned funds from several changes most notably relating to mortgage valuation, mortality rates, and lapse assumptions. For mortgages, we updated a number of assumptions reflecting changes in market conditions. This was partly offset by the positive impact of expense assumption updates in the United Kingdom, reflecting the partnership with Atos. One-time items and other had only a small impact on balance. Several one-time items in the U.S. largely offset each other. The benefit from the elimination of our variable annuity captive of $1 billion was offset by the impact of U.S. tax reform. Let's now move to U.S. credit risk sensitivity. Over the last years, we have actively managed down the sensitivity to a deterioration in credit markets for our businesses. Decrease in credit exposure with the result of various divestments and product redesign efforts as we focused on fee and protection-based businesses. As a result, we have significantly decreased our general account from over $135 billion in 2007 to just over $80 billion in 2018. With the US RBC ratio well above our target range at 465% at year end 2018, we're well positioned to absorb credit losses. In a 1 in 40 scenario, we would expect to see credit defaults similar to the level seen in 2009. Even in this scenario, which includes the impact of the anticipated rating migration, our U.S. RBC ratio would remain in the upper end of our target range of 350 to 450%. Turning to slide 12, at the end of the second half of 2018, holding excess cash amounted to 1.3 billion euro. Gross remittances to the holding of 786 million euro included over 500 million euros from the U.S., €215 million from Europe, including a final dividend from the Netherlands and the UK, and €50 million from Asia and Aegon Asset Management. These remittances were more than offset by €700 million of debt redemptions and €57 million of capital injections to support the growth of business and asset management in Central and Eastern Europe, Spain and Portugal, and Asia. In addition, the acquisition of Robidus, the leading income protection service provider in the Netherlands, led to a cash outflow of 97 million euros. Cash outflows related to the cash portion of the 2018 interim dividend and the share buybacks to neutralize the final 2017 and interim 2018 stock dividends, in addition to holding, funding, and operating expenses, amounted to about 600 million euros. As a result, our excess cash position sits within our target range of 1 to 1.5 billion euro. Let's now move to our gross financial leverage ratio on the next slide. As of the second half of 2018, we retrospectively changed the internal definition of shareholders' equity we used to calculate both the return on equity as well as the gross financial leverage ratio. To align it more closely with peers and rating agencies, we will no longer adjust shareholders' equity for the re-measurement of defined benefit plans. Based on this more conservative calculation, the gross financial leverage ratio decreased by 160 basis points to 29.2%, which is still within our target range of 26 to 30%, which we do not intend to change. This was driven by the previously mentioned €700 million of debt redemptions in the second half of 2018. Under the previous definition, the gross financial leverage ratio would have been 27%. As mentioned on previous occasions, we are actively managing our leverage ratio toward the lower end of our 26% to 30% target range. Despite the new, more conservative definition, again, we do not intend to change our gross financial leverage ratio target range. This reflects a focus on further deleveraging the group, which will lead to an increase in the quality of our capital. I will now turn it over to Alex so that he can provide an overview of our key strategic achievements and outline our new medium-term targets.