Aegon Limited

Good day and welcome to the AGON first half year 2020 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jan-Willem Weidema. Please go ahead, sir.

Thank you, sir. Good morning, everyone, and thank you for joining this conference call on AGON's first half 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. It is with great pleasure that I welcome our new CEO, Lars Riese, for his first results conference call at Aegon. Also with me is our CFO, Matt Reiter, who will take you through the financials. At the end of the presentation, we will, of course, leave more than sufficient time for your questions. Let me now hand it over to Lars.

Yes, thanks Jan Willem, and good morning everyone. Thank you for joining us in today's call. In my part of the presentation, I would like to provide my initial views on the company and the road ahead after three months in the job as Agon's new CEO. I will then hand over to Matt, who will take you through our first half 2020 results. Before we start with that, I will share with you how the COVID-19 pandemic has impacted Agon and its customers and what our response has been. So let's move to slide two. As you can see on slide two, underlying earnings for the group were down by 31% to 700 million euros. Higher mortality rates, in part due to COVID-19, and lower interest rates have had a significant adverse impact on our U.S. business. Earnings in our other businesses held up well, supported by lower expenses. Net income was impacted by a charge related to our assumption review in the U.S., amongst others to reflect the significant drop in interest rates in the past year. From a commercial perspective, the lockdowns in response to the pandemic have been a challenge, and particularly for our agency sales channels, which led to lower light sales. In response, we are actively managing our product portfolio and increasingly doing business virtually to serve our customers. We have, for instance, expanded on non-medical underwriting limits in the U.S. light business due to difficulties for paramedical examinations to take place. We have been able to do so by leveraging our existing capabilities in automated underwriting in lower face value policies and are now using predictive data sources in our underwriting process for policies with up to $2 million face value and in selected risk classes. This supported sales in our key distribution channel for the U.S. life business, World Financial Group. Digital business models like our e-commerce partnership in China are doing well in the current conditions. Our mortgage business in the Netherlands also continued to perform very well while delivering a record high level of mortgage production of over €5 billion, thanks to the highly automated nature of this business. In several of our deposit businesses, including the UK platform, we saw increased retention rates. Furthermore, we again achieved net deposits from external third parties in asset management, which add to Incom's track record of eight consecutive years of net deposits. Together with net deposits in our online bank Knob, this led to positive net deposits of a billion euros. From an operational perspective, we have dealt well with the fallout of the pandemic. Our service to customers has continued at a high level. In some areas, we even realized the highest customer satisfaction scores ever as we adapted successfully to servicing customers virtually and have supported our customers and business partners. I'm very proud of our employees who have really delivered and have demonstrated their commitment to customer service in these extraordinary times. Let's now move to slide number three. Let me turn to my initial views after three months as Agon's CEO. It is my ambition and that of my management team to transform Agon into a more focused, high-performing group with a balanced portfolio of businesses that is generating reliable free cash flows and delivering sustainable and attractive shareholder returns. This is not where the company is today, and it will take time to get there. In summary, there are four areas of focus that I believe will contribute to making Agon a materially better, more enduring, and profitable company in the coming months and years. These are the following. Number one, strengthening the balance sheet. Number two, creating a more disciplined management culture. Number three, improving efficiency. And number four, increasing our strategic focus. So let me take you through the four areas one by one, starting with strengthening of the balance sheet. Agon's capital position is overall satisfactory, as demonstrated by its Solvency II and RBC ratios. However, significant uncertainty remains on what the economic impact of the COVID-19 pandemic will be going forward. And we expect continued adverse mortality experience in the second half of 2020, as the number of daily infections in the U.S. remains high. This contributed to our decision to let our U.S. business retain their second-half remittance to the group to strengthen their balance sheet. In addition, we believe that our leverage and the volatility of our capital ratios are too high. We will therefore take action to strengthen the balance sheet, bring down leverage, and improve the company's risk profile to reduce volatility. This should lead to more consistent remittances to the group. These remittances should be based on recurring capital generation rather than on one-time free cash flows as a result of management actions. In this context, we announced today several steps to strengthen our balance sheet, but more will follow. The first is that we have decided to retain the final dividend for 2019. The second is that we are reducing the interim dividend from a level of 15 cents per share last year to 6 cents for 2020. We anticipate that free cash flows are sufficient to cover the rebase dividend, even in reasonable stress scenarios. From here, dividends and other means of capital return to our shareholders will be based on a regular assessment of the company's financials according to customary governance. At our upcoming Capital Markets Day in December, we will provide more detail on the outlook for future dividends. The third step is that we are reducing our leverage. Rebasing the dividend creates room to pay down debt and strengthen the balance sheet. The announced interim dividend equals an annualized cash outflow of about €250 million. Together with approximately €300 million holding funding and operating expenses, this brings the annual cash outflow for the holding to around €550 million. For the time being, free cash flow that is generated above this amount will be used to strengthen the balance sheet and reduce leverage. We will, for instance, repay $500 million senior debt in December of this year. The fourth step is the announcement of the assumption changes in the United States. Following a rigorous process, we have decided to strengthen our mortality and premium persistence reserves for the life business to reflect the adverse experience in recent years. We have also made our morbidity improvement assumption for long-term care more conservative. Furthermore, we have lowered our long-term interest rate assumption by 150 basis points to 2.75 basis points, following the sharp decline in interest rates since last year. And Matt will take you through these in more detail. As is customary, we will conduct assumption reviews in our European businesses in the second half of this year. Rebasing shareholder dividends is not a step that we take lightly. we realized that this business should, over time, be able to produce more than this level of dividends by way of capital return. And we believe that it can. But for now, this is the right level of dividends which allows us to deal with deleveraging, reduce the risk profile of the company, and navigate through the COVID-19 pandemic. We are working on plans to improve the operating performance of the company to increase its free cash flows, and successful execution in the coming years will put the business in a place where it can produce higher levels of capital return from dividends and share buybacks. The second focus area is creating a more disciplined management culture. For Agon to fulfill its potential, we need a high-performance culture. Underperformance will be addressed without delay, decisions will be taken timely, and the sense of ownership will be fostered, and complexity will be reduced to minimize the risk of negative surprises. Let me give you some initial examples of the direction I would like to take us in. For instance, we've installed a monthly performance review system with the business units. This ensures that the internal dialogue around performance with a focus on delivery will be stepped up, whereby senior leadership will be held accountable for results. Another example, we have conducted an organizational health survey with the help of an external party to understand the underlying behaviors and patterns which make up the current performance culture of the group, and we have defined levers to change. A successful transformation will require discipline, execution focus, and a renewed customer centricity. Another example, we will attract new talent to the company in addition to our internal talent pool. And in that respect, I'm very pleased with the appointment of Duncan Russell in the newly established role of Chief Transformation Officer. Duncan will work closely with myself, Matt, as well as other members of the management team to drive our strategy and help transform the organization. In addition, we have decided to move to quarterly results disclosures as of the first quarter of 2021 to update you more frequently on our progress in vain of the accountability that fits a high-performance culture. The third area of focus is improving efficiencies. We are currently undertaking a detailed review of the operating performance of AGOS businesses, both absolutely and relative to its peers, with the help of an external party. This is a granular piece of work that will result in detailed internal targets and associated KPIs to drive down costs and improve performance. At the Capital Markets Day in December, I expect to be able to elaborate on our ambitions here. Lastly, we need to increase our strategic focus. There is ample opportunity for Aegon to create value for its shareholders, and we have strong foundations to build on. For example, the group is well represented in large established markets, the U.S., the U.K., and the Netherlands, and in large developing markets, including China and Brazil. Aegon also has very good relationships with other large and strong financial services groups, such as with Banco Santander in Spain and Portugal. And in addition, we operate a substantial asset management business, both in terms of own assets and those managed for third parties. We have many satisfied customers served by loyal and motivated employees in each of these businesses. We need to increase our execution focus in these markets and improve our performance to ensure we capture their full potential. Having said that, we currently operate in more than 20 countries, and I believe we need to sharpen our strategic focus. This requires disciplined capital allocation and portfolio decisions by concentrating on those countries and business lines where Avon can create most value. So to recap, our priorities are, number one, strengthening the balance sheet. Number two, creating a more disciplined management culture. Number three, improving efficiency. And number four, increasing our strategic focus. I appreciate you all have questions and want more detail. Let's move to slide four, detail. We are working on our plans to transform Agon. A transformation like this will take time, so we will update you regularly. The next moment for such an update is set for the 10th of December during our virtual Capital Markets Day. We have themed this event Focus, Execute, Deliver. During this event, we will update you on our strategy and portfolio management framework, our views on the appropriate level of leverage, our plans to improve the company's financial performance, and the outlook for returning capital to shareholders. And with this, I would like to hand over to Matt, after which we will provide opportunity for Q&A.