Aegon Ltd. New York Registry Shares

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.

Thank you, Matt, and good morning to everyone. In my part of the presentation, I present a new set of medium-term targets for the period 2019 to 2021. But let me first outline our achievements of the period 2016 to 2018. I'm starting here with slide 15. In the past years, we have simplified and modernized our group. we have refocused the business towards areas with higher growth and the potential for a broader advice, service and solutions-based relationship with all of our customers. We've built the company to be more relevant than ever to our 29 million customers as we help them through the journey of the financial lifetime. In doing so, we've not only significantly increased our free cash flow, but also strengthened our capital base. Today, we have a well-established capital framework with strong solvency ratios for our main units and for the groups. One example of our measures to further improve the capital position of the group was the elimination of the variable annuity captive in the US in the second half of 2018. Furthermore, we have optimized our portfolio over the past few years. We have rationalized our geographical footprint by focusing our resources on key markets where we have either leading market positions and scale or where we have strong growth opportunities for the future. And the most recent example being the completion of the divestment of operations in Slovakia and the Czech Republic on January 8, 2019. I am proud of what we have achieved over the past three years. And during that period, we've attracted nearly 4 million new customers and more than 100 billion euro of additional assets. Having improved our competitiveness, strengthened our capital position, and diversified our business, we are now in a position to fully focus on growing in our main markets. On the next slide, I will briefly cover how we delivered all our 2016-18 targets. As Matt mentioned earlier, we have delivered €355 million of annualized savings, slightly ahead of our 2016-2018 target, with the US falling a little short of the target, but this was more than compensated by additional savings in the Netherlands and the Netherlands. We've also achieved our target of returning €2.1 billion in capital to shareholders. And at the same time, we have increased our capital position and quality which allowed us to further increase our dividend. We will propose a final dividend for 2018 of 15 cents per share, which brings the full year dividend to 29 cents, 2 cents or 7% higher compared to the previous year. The strength of our franchise is demonstrated by a consistent increase in the return on equity year on year. Since 2015, we have increased the return on equity by about two full percentage points. And as Matt has covered in his part of the presentation, we changed our internal definition to calculate our return on equity to align closer to definition used by peers and rating agencies. And based on this new definition, we have achieved a return on equity of 10.2%, while the old definition would have resulted in a return on equity of 9.3% for 2018. So let us now look forward and turn to slide 17 of the presentation. For the next strategic cycle, covering the period 2019 to 2021, we'll be focusing on driving profitable sales growth and on sustainably growing our capital generation. We'll do this by leveraging our large customer base where we have the opportunity to broaden and expand our customer relationships by offering our strong suite of bundled products and advisory propositions. As customer needs and demands evolve, we will continue to evolve our operating models towards less capital-intensive, more fee-generating and protection products, while at the same time enhancing the customer experience through the extended use of data and data analytics. We are very well placed to benefit from long-term retirement trends and pension needs of our customers. For example, the Americas attracted 700,000 new customers over a quarter, and also Spain and Hungary attracted 200,000 customers in the same period. We outlined at the Analyst and Investor Conference in New York how Transamerica in the U.S. is well ahead of the competition with its market-leading partnership with TCS. This partnership will enable Transamerica to provide faster and better propositions to our customers and to grow its reach in the U.S., the largest retirement market in the world. This approach will generate significant financial benefits, as I will explain on the next page, introducing our new medium-term targets. I'm on slide 18. We are confident that our growth strategy will deliver sustainable and attractive returns to shareholders. At the core of our strategy is the capital we generate from our global operations. For the next three years, we are targeting a normalized capital generation of €4.1 billion, cumulatively. Normalized capital generation excludes market impacts and one-time items and is after holding funding and operating expenses. Our strategy will lead to attractive returns to our shareholders as we are targeting to pay 45% to 55% of normalized capital generation as a dividend to our shareholders. Going forward, we will support our medium-term targets with a one-year remittance guidance. And for 2019, we aim for gross remittances of €1.5 billion. This will support our annual dividend. In addition, remittances will be used to invest in growth, finance holding funding and operating expenses, and leave sufficient financial flexibility for further deleveraging, potential add-on acquisitions for additional capital returns to our shareholders. And last but not least, we continue to target a return on equity of more than 10% going forward. And on slide 19. Our targets are underpinned by an active management of our portfolio of businesses. Going forward, we are grouping our businesses into three distinct strategic categories. The strategic categories are differentiated from each other based on the maturity of our businesses in our different markets, and each business is managed according to its unique features. This will allow us to unlock the full potential of our larger customer base and market propositions, while at the same time leveraging our capabilities and proposition where they are most beneficial. The first category, manage for value, includes mature, at scale businesses which often operate in a single-product relationship and are generally spread-based. Our remaining closed books of businesses are also included here. For example, our Dutch Life and the UK existing businesses. We carefully manage our financial operational risk to ensure that the important cash flows we generate from these businesses are optimised. Managed for value businesses are an important capital and earning source for the group for many years to come. In the second category, drive for growth, we have group businesses which are at scale and have strong market positions with an attractive, profitable long-term growth potential. These businesses are highly capital generative and invest part of the capital generation in strong new business growth. Propositions are mostly digital or platform-based, with an emphasis on fee income and protection coverage, while focusing on broader and longer relationships with our customers and advisors. Good examples here are the US workplace business and the UK's digital solutions. And finally, we have the scale-up for the future category, which are a set of businesses that have a meaningful marketing opportunity. Similar to the drive for growth businesses, these businesses focus on fee and protection-based products, but still require scaling up in size and expanding the customer relationships to multiple products. Scale-up businesses bring new platforms, technology, or business models into the group, which can also be leveraged across our current drive for growth business. A business might shift between categories if the features of the market change or a business develops significantly. So let me now give you an overview of our current portfolio structure based on these three categories on page 20. As you can see on the left-hand graph, Manage for Value and Drive for Growth businesses each generate today about half of our capital. Drive for Growth are the businesses at the core of our growth strategy. And as the middle graph shows, the vast majority of our new business train is allocated to drive for growth businesses. As outlined during our A&I conference in New York, we invest in new business, especially in our indexed universal life and retirement fund businesses in the US. Scale-up for the future businesses focus on propositions, which as you can see, have limited new business train. On the right side of the page, we show the allocated IFRS capital. Managed for value businesses are capital intensive and represent a significant amount of IFRS capital. While the drive for growth businesses have the highest returns, are at scale, and therefore have more than half of the group's capital allocated to them. And today only 9% of the group's capital is invested in your future growth businesses. On the next slide, slide 21, I will highlight how these businesses will contribute to the growth of our future capital generation. As mentioned earlier, we are targeting a normalized capital generation of 4.1 billion Euro, cumulatively over the period 2019 to 2021. And this is an increase of more than 25% compared to the last three years, where we generated 3.1 Euro billion of capital generation. Looking at the different strategic categories, we expect a slightly declining capital generation from the managed for value businesses as the portfolio matures. Clearly visible is a strong increase in the capital generation from the drive for growth businesses in the next three years. We expect the growth and capital generation in this category to be driven by the allocation of the vast majority of the more than 3 billion euro we will invest in new businesses. Capital generation on scale-up for the future will grow from a small basis of €300 million of capital generated in 2016 to 2018 to a stronger contribution over time. And in the next three slides, I will give you a more detailed view on our portfolio. I'm on slide 22. And on the left-hand side of the slide, you will find listed the businesses which we include in the Manage for Value category. In 2018, these businesses generated normalized capital of around €700 million and earnings of €749 million with a return on IFRS capital allocated of 8.1%. And this is before the benefit of leverage at the holding. For the future, we expect these businesses to mature further and Therefore, capital generation and earnings will trend downwards. At the same time, this category remains capital intensive and will require allocated IFRS capital of more than 7 million euros for the next years. Continued expense savings will remain the key focus point as the size of this portfolio reduces over time. And at the same time, we will consider all options to optimize the capital position of these businesses and potentially also to accelerate the capital generation. For example, in our Netherlands defined benefit pension and individual life businesses, we are managing expenses down as the books decline, as demonstrated by a recent expense savings program. We're also optimizing investment income by investing in assets with attractive risk-return profile, such as mortgages. and we are migrating customers to new capitalized solutions, such as the new PPI-defined contribution pension plans, but also long-term bank savings and investment products. Another example of cost reduction is a recently announced expanded cooperation with Atos in the UK, who will support the servicing and administration of the non-platform customers in the UK's existing businesses. I'll now turn to slide 23, where I will outline the features of the Drive for Growth category. Our larger and more mature businesses are categorized in Drive for Growth. For the U.S., the four larger business lines, life, accident help, retirement plans, and variable annuities are all included. Furthermore, our U.K. digital solution business, Aegon Asset Management, and our smaller but well-developed countries in CEE, and our Asian high net worth operations are part of Drive4Growth. These businesses have generated about €900 million of capital, €1.3 billion of earnings, and delivered a strong 10.2% return on IFRS capital in 2018. Again here, before the benefit of leverage at the holding. The results of operational leverage in larger businesses The return on capital is expected to increase even though the capital allocated is trending upwards from today's 11 billion euro allocated IFRS capital. Key enablers for this growth story are the completion of the co-funds integration in the UK and of course the TCS partnership in the US. The partnership with TCS will not only modernize our operating platform but will also support the acceleration of our organic growth. strengthen customer relationships, as well as increase customer retention. The banks' platform will enable us to shorten time to market for new products, to increase sales efficiency, and to provide better service for our customers. Businesses in a scale up for the future category are expected to be the longer-term future growth engines for the group. And let me introduce them to you on the next slide, slide 24. Capital generation in a scale up for the future category is currently small with less than 100 million euro per year, but we expect it to grow over time considerably. Also underlying earnings amount only to roughly 200 million euro, but will grow in the next years. Only a limited amount of IFRS capital with less than 2 billion euro is currently allocated to these businesses and generates a return capital of about 7%. And as the business grows and gains scale, we target considerably higher returns on capital from these operations. We consider businesses such as the Dutch service business, Spain and Portugal, and Latin America as promising businesses which will achieve scale and become meaningful contributors to the group. Our Dutch bank operations and the US mutual funds business are already further advanced in terms of the financial contribution and we expect them to capture significant growth potential going forward. Aegon's Dutch banking activities are an excellent example of a scale-up for the future business. Before 2012, the operation was subscale and loss-making. Since then, Aegon Bank has been restructured in terms of processes, costs, and product offering. And today, Aegon Bank has a significantly improved return on capital of well over 10%. It has launched KNAPF, a digital disruptor in the Dutch banking market, as a new brand, and it is making strong inroads into the fast-growing segment of the self-employed, adding 40,000 customers per year. Knop is recognized for excellent service levels, as demonstrated by having the highest net promoter score amongst Dutch financial service providers. Our Asian joint ventures, with the exception of our Chinese joint venture, are still lost-making, However, we are confident that our investments in countries like China and India will create significant value over the longer term. While we develop the businesses based on modern platforms and digital technologies, we also apply strict investment criteria as shown on the right-hand side of the slide. Should our investment criteria not be met, all options are open for these businesses. And over time, and as businesses develop and mature, we expect them to move to the drive for growth category as strong growth contributors to the group. So finally, let me turn to slide 25. In summary, we're targeting increasing capital returns to our shareholders. As mentioned, between 45 and 55% of the normalized capital generation will be returned to shareholders in the period 2019 to 2021. And I've outlined on the previous slides how we think about generating sustainably growing capital. Targeting gross remittances of 1.5 billion euro for 2019 supports our view of having solid dividend coverage while maintaining ample financial flexibility. And we will use our financial flexibility for further deleveraging, potential add-on acquisitions or additional capital returns. to our shareholders. I strongly believe Aegon is today well positioned for the future and has a broad spectrum of businesses to deliver on the targets we have set. For the full year 2018, I am pleased to announce that we propose to increase the dividend to 29 cents for the full year. This is a 2 cents per share or a 7% increase on a year-on-year basis. So to sum up, let me now turn to slide 26. Looking ahead, we are well-placed to focus on profitable growth and sustainable capital generation, building on the progress made in recent years. By successfully executing on our strategy, we will be able to deliver on our purpose and help many more people achieve a lifetime of financial security, in addition to generating long-term value for all our stakeholders. I'd like to thank you for your attention, and Matt and I are now happy to take your questions.

Thank you. Ladies and gentlemen over the phone, if you wish to ask a question at this time, please press star 1 on your telephone keypad. Please ensure that the mute function is switched off to allow your signal to reach our equipment, and if you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Once again, it's star 1 to ask a question. We will now take our first question from Robin van den Broek from Mediobanca. Please go ahead. Your line is open.

Yes, good morning, everybody. I guess my first question is on the definition change of the leverage ratio. I mean, it's quite a big step change, and you're still sticking to the lower end of the target range, which effectively means that a lot of capital is that's coming in in future years is allocated to reducing the leverage versus the previous definition. So I was just wondering what's triggering that and to get a little bit more color on that because I think that's probably also the reason why the shares are not very responsive to your new targets. In relation to that, I was just thinking about how should we think about dividend progression. I mean, I think the one sense added to the final dividend I think is is supportive, but the payout ratio of 45 to 55% is not indicative for progressive dividends per se. So just wondering if you look at your whole cash level, your services to levels, your gross cash generation guidance for 2019. I mean, these are all pretty supportive to keep that dividend growing. I was just curious to see when you would adapt the higher end of the payout ratio and when would you adapt the lower end of the payout ratio? And thirdly, I guess U.S. reporting has been somewhat disappointing throughout 2018. I guess we can blame markets for a certain extent. But I was just wondering, I mean, commercial momentum still needs to turn around. You're suffering margin pressure. Still, you talk about growth while markets going forward might be a lot less supportive than they have been in the last years. I was just wondering what kind of growth inflows are you baking into your business plan to get to your growth ambition levels? Thank you.

Okay, thanks, Robin. This is Matt. Maybe on the definition of the leverage ratio, this was a – we took a look at what peers were doing. We were taking a look at how the rating agencies were looking at leverage in the capital base, and we made this move to align with peers here. The actual – I guess AGON had implemented this adjustment where we were adding back the remeasurement of defined benefit plans back in 2013 in order to keep the – and this relates to an accounting change that was implemented at that time for IFRS. And we did it at a time to make sure that we kept the capital base stable and to make sure that it was not too volatile there. But then having looked at what peers were doing and what rating agencies and how they were looking at it, we decided to make the change. Now, having said that, so we're not going to – as you mentioned, we are not going to change our target ranges. And this does reflect the fact that we do want to move the leverage ratio down over time. But it doesn't necessarily represent massive amounts of additional deleveraging. We are retaining earnings in excess of the amount that we're paying out as dividends. So – So I think that's an important component. We would see this drip down over time to the extent that we retain earnings. With respect to the dividend progression, I think what we wanted to do is set a capital generation target, a three-year capital generation target that we felt that we could really make. We set that 45% to 55% target range just to give you some guidance as to how we intend to deploy that capital. The two-cent dividend increase for this year, it should send a strong signal that we have confidence in the progression of being able to generate normalized capital, but we are not giving any guidance further than that. So we want to stick to one-year guidance at a time, gross remittance target from the business units one year at a time, and the overall three-year capital generation target. But again, I think you should take some something from the fact that we increased the dividends you sense today.

Let me take your third question. You are absolutely right to say that the sales development in 2018 in the U.S. has been disappointing. We have, of course, been working very hard on the transformation of our business. We spent a lot of efforts in getting the TCS outsourcing deal done. And we feel therefore that today we're well placed and that a lot of the steps we had to take in order to be well prepared to grow, we've taken those steps and we can now focus on the growth in the coming years. It's difficult to give you a number of net flows and deposits because, as you know, you have deposits of all different categories with different margins. But what I think would be helpful is to guide you and to remind you that actually we have in our plan, shared in terms of capital generation baked in, and 20% increase of our new business train from a low level of 850 million now. So I think that will give you a good indication of how we are intending to invest in growing our business going forward. And which areas in the U.S. are going to be most focused on is individual life. It's IUL product. As you know, that's a market that we know well, and we have very strong distribution capabilities. Term life also, we've done some repricing at the end of last year and we're seeing the benefits there. And of course, the big focus will continue to drive positive net inflows in our retirement business. The Mercer acquisition has brought us a capability which we didn't have before, which is really in the mega cases. So we expect to see this year another positive impact of the full integration of Mercer and therefore a more successful development in terms of new business sales. in particular in the big cases. All I can say at this point in time that we, on the basis of what we've seen in January, we are pretty encouraged about that development.

Okay, thank you. Maybe one follow-up on the leverage ratio. I think in the past you said that IFRS 17 would negatively affect the leverage ratio. I presume that is still the case, but Will you still be targeting a low end of the target range after IFRS 17, or is this basically just in anticipation of IFRS 17? Thank you.

I think what I've said is we don't know exactly where IFRS 17 is going to come out, so let's say the prudent move would be to reduce leverage in anticipation of that, but we have to see exactly where it comes out, and then at that moment we may decide to reset our target ranges, but It looks like today, that time might not come until 2022. So for right now, we stick with these target ranges.

Okay, thank you very much.

Thank you. We will now take our next question from Farouk Anis from Credit Suisse. Please go ahead, your line is open.

Hi there, thank you very much and good morning. Firstly, just returning to the US retirement services business. Looking at all the drivers that you showed of the lower profits in the second half of 2018, it seems to me that some of this is kind of a continuing effect in 2019. So I was wondering if, as of today, your $52 revenue per participant guidance that you gave still stands, or whether, as of today, there might be a slight reduction on that in the near term? Just going back to what you said about flows in January, are you basically seeing now positive net flows? That's question area one. And then question two on numbers, you've given the target components for the $4.1 billion of cumulative capital generation. So that's $3 billion strain, $8 billion normalized capital generation, and $1 billion of holding. What were those numbers for the last three years so we can see what's changed in the mix?

Thank you. So I take the first one. On the retirement services business, I think you're right. I think the guidance that we had given was $52 per participant. I think the last number that I saw was something a little north of 4.2 million participants. I would expect that the 52 would come down somewhere between 5% and 10% as a consequence of these ongoing things that you rightfully mentioned. In terms of flows for January, without giving any numbers, so far they look pretty positive. You asked a question about the composition of the capital generation rate. for the three-year target. I think we're going to have to come back to you for the last three years of historical information there, but I think that can be done offline.

Okay. Thank you very much.

Thank you. We will now take our next question from Ashik Musadi from JP Morgan. Please go ahead. Your line is open.

hi thank you and good morning alex good morning but uh just a couple of questions sorry going back to the capital generation and the dividend so if i think about your guidance of 4.1 billion it's over three years so is it fair to say that it would be like an increasing numbers i starting with a lower number in 2019 followed by a higher and and higher after that so is that fair to say and uh just in terms of payout ratio 45 to 55 percent i mean if we let's say get into a normal market basically rather than super volatile market is it fair to say that a 50% payout ratio is more reasonable rather than going towards 45% or 55% I mean we are just analysts so we are just taking like 50% payout ratio is what I think is what the guidance looks like so any thoughts on that would be great and thirdly is in terms of the same capital generation can you give us some clarity as to about the geographical breakdown as well on that number. Any thoughts on U.S., how much Netherlands and how much U.K. you're expecting? Any thoughts on that would be great. Thank you.

So I think the first one, so you mentioned what do we think that the progression of the normalized capital generation might be. So we telegraphed the 4.1 billion over the next three years. I think you've got it pretty right. We generated 1.4 billion capital generation in 2018. That was based on basically a surplus strain of about 860 million euro for the year that's probably 100 million or so light of where we thought it might be. So you can kind of use that as a guide for a trajectory. In terms of the capital generation for each of the countries, what we did in the target is try to group things in buckets at kind of a high level. But I think we can probably come back to you on country level detail on that one. But our goal here is, and this is sort of an important one, We want to make sure that we're putting a very limited number of targets into the market. So, you know, putting capital generation out there for the group for a three-year period and the payout ratio, the 45% to 55% and the 10% ROE with a one-year remittance guidance, that's all that we're going to do in terms of targets. We don't want to break it down too much more than that. We do it in aggregate just to limit the number of targets that we get out.

Sure. I just have one follow-up. Just one follow-up on that. I mean, you mentioned around 45% to 55% payout, so you will still be retaining around 50% cash, which is still a healthy amount, around $600 million, $700 million a year. I mean, what would be your – I mean, the priority list for that? I mean, will it be leverage reduction first, M&A second? Because – And any thoughts on what are on the table on the M&A perspective at the moment?

Maybe let me answer this question. You're rightly pointing out that we are retaining capital for flexibility. I mentioned that in my presentation. We have said that we need to ensure that we cover, of course, our own expenses, holding costs, the cost of leverage is the first thing. Matt addressed also just now leverage. We want to stay in the middle of the range of our leverage ratio. But importantly also, we want to have flexibility for add-on acquisitions. We've done a few which I think have demonstrated that we're able to, would like co-funds, immerse our small add-on acquisitions, which effectively bring in a lot of new customers on our existing platforms. I think that's a very attractive way for us to attract new customers and growing our business. And as I said in my introduction on the targets, the remaining part will be considered to be returned to shareholders.

Okay. Thank you.

Thank you. We will now take our next question from Nick Holmes from Societe Generale. Please go ahead. Your line is open.

Oh, hi there. Thank you very much. Just a couple of questions on the US. First, How concerned are you about another potential market downturn, especially since the retirement business took a pretty big hit just on the Q4 market slump? And then a wider question. Are there any circumstances in which you might consider IPOing the U.S. business? Some tricky questions, I know. Thank you.

Well, Nick, I think these are questions that are reasonable questions in relation to the market. You're right to say that the market has had an impact on a pension business. But I think it's not only on the fees because, effectively, what you see is that the assets decline in value and, therefore, the fees decline in value, but also in uncertain times. people are not so prone to make changes and to invest for the future, so they're kind of holding off a little bit. So what you see is that market downturns are usually not very good also for new business because people just decide to postpone a decision to take. On the U.S., I will repeat what I think you know, that the U.S. is an integral part of our organization. has been very supportive of the group and will continue to be an integral part of our organization and supportive of the group in terms of capital generation and supporting us paying the dividends.

And sorry, just a quick follow up. In terms of synergies between the US and the rest of the group, can you identify any sort of business rationale for having such a large US operation?

Well, there's quite a lot of benefits. First of all, there is a diversification benefit. There is a diversification benefit in being present in different parts of the world from an economic cycle point of view, from a business type point of view, and also, therefore, from a capital point of view. I think it's extremely important to recognize the diversification benefit directly and indirectly coming across in the amount of capital that we would need to hold. What we also make sure is that we leverage from an operations point of view as much as we can. So, as you know, we have a separate technology group that provides services to each of our units around the world. That can, of course, leverage scale, which we could not do if we didn't have the group together. We have an asset management operation, a global asset management operation that has to scale the capabilities that it would not have if it would be in different parts of the world and stood up in different parts of the world. And finally, one of the things which I think we should also not forget, in addition to the operational advance around IT, procurement, and others, is that we need to be able to continue to attract good talent, strong talent. There is a war on talent. We are changing our business into a much more digital business and a much more technology-driven business, and we therefore need to attract the right people. I can assure you that it is much easier for AGON to attract the right people by being part of a global operation, global organization, very visible here in the Netherlands, very visible in the U.S., and that is a long-term benefit that I think we should not underestimate.

Okay. Thank you. Very clear.

Thank you. We will now take our next question from Willem Hawkins from KBW. Please go ahead. Your line is open.

Hello. Thank you very much. First of all, the Dutch mortality and lapse assumption changes, do they have any impact on future earnings? If you could guide on that, that would be helpful. Thank you. Secondly, long-term care, good news, doesn't seem to be much of a feature in the second half, at least in the headlines. But is there anything that we should be thinking about in terms of long-term care sensitivity through 2019? In particular, I think the morbidity of improvement assumption is still embedded, and I'm not sure what the timetable and likelihood of adjusting that is. And then lastly, maybe this is unfair, but I'd just like to understand the colour. Your $52 retirement plan guidance was only given sort of two months ago. So to the extent that you're now guiding that down about 5% to 10%, as you just said, is Does that basically reflect the fact that sort of the target was like one of those things that was already kind of work in progress a couple of months ago? Or is there something very specific that's changed in the past couple of months that you really want to alert us to? Thank you.

William, yes. So maybe on the Dutch mortality, just maybe as a refresher, what we do is we update our long-term mortality expectations based on European mortality, and we do it on a two-year lag. So what we're reflecting now is there's been basically mortality improvement from 2015 to 2016. I think, as you well know, Actually, mortality has gotten a little bit worse in Europe. The flu seasons have increased mortality. So you would expect to see some of that actually come back perhaps in later periods as we continue to update the mortality assumption. In terms of impact on long-term earnings, it's really negligible. This is very long-term business, and this is really a fair value liability business for the most part. So it's all taken in a lump sum. to the extent that you would see mortality deterioration, you would see that actually come back in earnings. So that would maybe improve things as we update in the next year and the year following. In terms of long-term care, you're absolutely right. What we had seen in the experience for the, let's say, for the full year morbidity and claims experience, it was pretty much exactly in line with our management best estimate. It was a little bit – so that was, I think, very good news. We do our normal updates in the second quarter for the U.S., so that will continue. We'll continue, as we always do, to look at all of our major assumptions to update. But I think one important one is, so for the morbidity improvement, we assume this 1.5% improvement per year for the next sort of 10 years. There had been a study that was being conducted recently, by the NAIC in conjunction with the Society of Actuaries. This had been announced, I think, in like the late summer of last year. And they had actually expected to get some news out, something like around the November time period. They actually completed the study, but it was quite inconclusive. So it doesn't appear that the NAIC is going to come out with any kind of an opinion as to the usage of a morbidity improvement assumption. and they'll continue to monitor experience so for 2019 I can't imagine sort of regulatory action or big society of actuaries type of study that would lead to any kind of different conclusion I would just reiterate the fact that we still like the assumption it's sort of the corollary for what you see in mortality improvement and again we've mentioned before improvements to improvements to Alzheimer's disease and and that sort of thing as sort of things that are coming down the road for morbidity improvement. So we still embed it in all of our reserving, premium deficiency reserve testing and the like. With respect to the $52 per participant, yeah, that had been telegraphed at the Analyst and Investor Day in December. It was based on what we had known then for our run rates But since then, we had a fairly significant market downturn in the last part of the year, and then we had some outflows and big plans toward the end of the year as well. So as I mentioned before, we're going to adjust that down 5% to 10% based on markets at the end of the year, but we've already seen markets recover a little bit, and again, Alex had mentioned that it's been a pretty good sales month for retirement plans. So this continues to be an area where we – we really focus on focusing on growing the business, not only in terms of increasing the sort of the fees that we get on that business through managed advice and other ancillary products and services that we attach to that, but also on really driving distribution efforts. So that really needs to be our focus for 2019, is to get that retirement plans business clicking again.

That's helpful. Thank you.

Thank you. Our next question comes from Dave Motemaden from Evercore. Please go ahead. Your line is open.

Hi, thanks. Firstly, a question you had mentioned, or I guess the first question on LTC, you had mentioned experience was in line with your best estimate assumptions for the full year. Just wondering how that looked on a statutory basis, because I know last year there were some moving pieces, especially on the claims reserve. So just wondering how that looked. Secondly, just in terms of uses of capital after the dividend, have you given any thought to transferring or looking at risk transfer of your long-term care book? I guess what are the chances that you think this could occur? Is this something you guys are looking at? And then finally, just on the morbidity improvement assumption, if you could give just sensitivity around removing that now that you've changed some of the assumptions in your PDR testing, that would be great. Thanks.

Okay, so on the long-term care, you mentioned what has happened on a statutory basis. At this point, the premium deficiency reserve testing has resulted in about a $700 billion sufficiency on that basis. What we have done is there was some prudency that was embedded within the premium deficiency reserve test we had haircut that 1.5% morbidity improvement assumption. We had haircutted that down to 1%, and now we have removed that prudency. So effectively, we have created some gap in the premium deficiency reserve testing by going up to the full 1.5%. In terms of uses of capital after dividend and risk transfer of long-term care books, very difficult to do, I would say. It's actually better for us to manage the book, as we have been doing. So I think you realize that there have been quite some benefits from putting through premium rate increases. And also you saw historically we had taken advantage of locking in some long-term interest rates using forward starting swaps. So that needs to be our strategy going forward. It's unlikely that we could do some kind of a risk transfer on the long-term care book. In terms of the sensitivity, I think what we had said before was that if we removed the morbidity improvement assumption in total, you would see an IFRS impact of around 700 million And I think it was the same thing around the statutory basis. And I think it holds today, but I want to come back and confirm it with you.

Got it. Thanks. And then just, I guess, just statutory experience on long-term care for the year. How is that? How did that look?

I don't have an update on that one. I think we can get back to you on that one.

Okay, great. Thanks.

Thank you. Our next question comes from Johnny Vo from Goldman Sachs. Please go ahead. Your line is open.

Good morning, guys. Just a couple of questions. Just coming back to the leverage ratio, you know, you spoke about the actions you're taking, potentially the growth in shareholders' equity or retained earnings. and also debt reduction. Could you give us a breakout or more clarity on how much you propose to actually reduce debt gross leverage as opposed to growing the book value? That's the first question. The second question just relates to co-funds. There's been quite a lot of transfers out of co-funds. How much are you capturing on your own Agon platform of those transfers out? Because I think the growth in funds or flows into the Agon platform doesn't quite correlate with their transfers out from co-funds. And the final question is just a question on the US reserves. What is the realised vol assumption on your US statutory reserves? Thanks.

Okay, so I take the first one. We're not giving any guidance on the amount of debt or hybrids that we are taking out of the market. We just give the general guidance that we'd like to reduce the leverage ratio over time. There is a certain amount of – so I mentioned that retained earnings, the fact that we do retain earnings, it does get you to the lower end. But we have to think about maybe a little bit of further deleveraging, but we don't need to get there. We don't need to do it in order to get down to the lower end in the medium term, let's say. You had asked about what is the realized vol assumption in U.S. at? That's a hard one. I can give you the – how do you want to say it? I think what you're asking is – what is the movement of statutory reserves and how is that affected by implied ball? But I think the larger point here is that, and I think you're referring really to the hedging results for the half year, we showed this pretty significant, we say, hedging loss on an IFRS basis relative to the macro hedge. But a large part of that is actually due to the fact that the IFRS liabilities are held on an SOP of 301 basis. And it's like a huge amount. I think the number that we reported for the overall macro loss was something like 468 million dollars. Basically, all of that was the IFRS, basically the movement in the IFRS SOP 0301 reserves and DAC. And we only had a $30 million payoff, I think, from the macro hedge. And that's the point that we tried to make in the presentation, that what matters is the payoff on that macro hedge. And in this case, we were $96 million short as a consequence of implied volatility not coming through the way that it ordinarily would when you see a sharp market decline.

Okay, that's clear.

Johnny, let me take the question on the co-funds. So on co-funds, we have both retail customers and institutional customers. And as you can imagine, the institutional customer is business that trades at a few basis points. What we've seen in the second half of the year is that a few of the very large institutional customers have taken some of their assets away because they wanted to spread their supply dependency. So effectively taken some away. But from an earnings point of view, it's of very limited impact because it's very low basis points. What I think is important to note is that we have seen actually better retention than we were expecting on our retail side of the business, which clearly is much higher, much higher returns for us, much higher basis points on assets. And therefore, that is the area we will continue to focus most on, on growing our retail part of the business while maintaining a scalable institutional business.

Okay. Thank you.

Thank you. Our next question comes from Andrew Baker from Citi. Please go ahead. Your line is open.

Hi. Thank you for taking my question. So three questions. The first one just on the U.S. retirement business again. So I know you're still seeing outflows at the same time you're investing in service levels to support future growth, but can you just comment on the current service levels and if there's anything we should be thinking about or concerned about there as it relates to the outflows that you're currently seeing? The second is on the ROE target. So the new ROE target is greater than 10% on the new definition, I believe, which compares to 10% target on the old definition for the old target. So how do you think about how those two reconcile? And is it actually a step down in the ROE target here? And if so, is it what really drove that? And third, I saw you had a, just on unclaimed property, I saw there's a small increase in provision in the U.S. Is there anything we should be thinking about, sort of wider industry concerns around unclaimed property, just because I haven't seen it come up for a couple of years now? Thank you.

Let me take the first part of the question. What we have seen is that we needed to make some investments, further investments, in particular in our engagement with the plant sponsors. A lot of our resources actually was being devoted to execute on the Mercer integration. So we have integrated the Mercer customers that we acquired. And it's clear that in that period of time, Our focus on the IT technology was to get that done, and we now need to catch up in providing and improving service levels. It's an ongoing movement. You know, it's like a train that keeps on going. So it's really about further increasing and making sure that our service levels are providing us a competitive position. The second thing we're doing in the retirement business, and this is why we have a unique offering, is that we have a combined retirement offering. and a supplemental health benefit in the same environment. And that makes us unique. What we also want to focus on is deepen the scope of our managed advice, and not only for people that are retiring, but also for people that are in plan. So these are all steps we are taking to take our service levels to the level where it needs to be, And to make sure that we are at the front of it and the Mercer acquisition now being behind, we are able to dedicate all our resources there. In terms of return equity target, I think it's important to note also, and it was mentioned in the context of the leveraging or the deleverage, potential deleveraging, is that we have a significant amount of return earnings which affect our return on equity going forward. So we wanted to make sure that we had a target. That is more like a minimum target. So we're not saying that we target 10%. No, we say we need to have at least 10% taken into account the fact that half our earnings are effectively retained and the other half is paid out in the form of a dividend. And in terms of the unclaimed property, Amit, is there anything you would like to add here?

Yeah, I can take that one. There's actually, you can think of it as a third-party administrator that is working with states to basically compare their records with what's called the Social Security death master file, basically to identify people that have passed away and understanding through our own data, you know, if claims haven't been filed and we can't find a beneficiary, we reach a settlement with the states to put them into what's called a sheet, So basically, these are contracts for which we were holding a liability, an IFRS liability, but due to the fact that they have passed away and we have made this arrangement with the third-party administrator acting on behalf of the states, that we are effectively accelerating the death claim payment and paying the state. And that's where the $32 million comes in. It relates to life insurance claims, not payout pension or payout annuity benefits. We had liabilities already on the books for this, so you can think of it as an acceleration of the death benefit payment to people that have passed away and we didn't know it.

Great. Thank you.

Thank you. We will now take our last question from Stephen Hayward from HSBC. Please go ahead, sir. Your line is open.

Thank you very much. I just wondered if you could give me an update on the the progress you're seeing on refinancing your grandfathered debt instruments, how this is progressing, what further things need to be done and whether there's optionality to, rather than refinance, to redeem in the future as well. And then I remember your SEC target was around 6% to 8%. Is this still in place and can you give me an updated SEC ratio at the moment? And finally... on VDAT, is that still a file in focus for you? And is it a file in focus in the whole or in part? I mean, would it be interesting to you as the whole business or in just parts of the business? Thank you.

With respect to the refinancing, so maybe just as a review, we have about 2 billion of restricted tier one that needs to be refinanced, but we're really in no rush to do so. This had been grandfathered securities at the implementation of Solvency II in 2016. So these are grandfathered for a period of 10 years. So we don't feel like we're in a rush. We have all the work done to go to issue into the markets. There's no restriction or anything on us doing so, but we want to make sure that we hit the markets in the right time. So basically we're just trying to find a good spot in the markets to minimize our costs Like I said, there's no real rush to do it, but we'd like to get an issuance in, I think, a first one within this year, given good market circumstances. On the second one, we're puzzling a little bit as to the FCC ratio. We don't know what that one is. You can maybe clarify that in a moment, but in the meantime, maybe Alex can talk about FIBA. Sure.

So we have expressed an interest in looking at Vivat because Vivat is an existing opportunity in our keyhole market. So it goes without saying that we should have a look at it. In terms of how we would look, what parts we'd look at it, at this point in time, the only thing I would like to say is that we should be looking at all options. And it's really early in the process now. I think information membranes actually have just gone out 10 days ago. So we'll see how that whole transaction is progressing. We'll have a look at it, but I want to remind all of you that there is no need from a strategic point of view. We have significant scale in the Netherlands, but if it makes sense from a commercial point of view, financial point of view, if we increase scale in certain areas that are of interest, then we should certainly look at it. Do we know in the meantime what SEC means?

Sorry, FCC is the fixed charge coverage.

Oh, fixed charge coverage. So tell me what your question was with respect to that one.

Yeah, is the target range still six or eight times, and where are you currently?

I have to get the number. I don't have it in front of me, but I think it's about eight times, and there's no change to the target range.

Thank you.

Thank you. There are no further questions in the phone queue at this time. I would like to hand the call over back to you, Mr. Binance, for any additional closing remarks.

Well, thank you for listening in for what is slightly longer than usual, and I look forward to seeing some of you this evening in London. Have a great day. Bye-bye.

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.