Aegon Ltd. New York Registry Shares

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.

Matt, over to you. Thank you, Lard. On the next couple of pages, I will take you through the main elements of our financial results for the first half of 2020. Let me start with IFRS earnings on slide six. In the first half of 2020, underlying earnings were €700 million and decreased 31% compared to the same period last year. Earnings were impacted by adverse mortality and lower interest rates in the United States. The U.S. life business reported €150 million of adverse mortality experience. Of this amount, we could specifically attribute €34 million to COVID-19 as a direct cause of death. However, we believe that a part of the remaining adverse mortality experience is likely also attributable to the pandemic. Furthermore, low interest rates and changes in the asset portfolio drove unfavorable intangible adjustments of €97 million also in the life business. This was partly offset by 55 million euro of favorable morbidity experience health. Somewhat more than half of this is from the closed block in long-term care, where higher mortality led to an increase in claims terminations. Other health insurance products benefited from lower claims as a result of reduced non-essential medical procedures due to the lockdowns that were imposed. Earnings in the U.S. retirement plans and variable annuities businesses were under pressure from outflows, as well as from investments in technology to improve the customer experience. Earnings in the Netherlands were resilient. The change in the treatment of underwriting results, underlying earnings, and costs related to the longevity reinsurance deal we announced last year were almost fully offset by lower expenses. In United Kingdom and asset management, lower expenses and growing fee income contributed to an increase in earnings. Earnings from Agon International increased, driven by fewer health insurance claims in Spain and Portugal because of the pandemic-related lockdowns. Next to underlying earnings, fair value items contributed positively to that income. This was mainly driven by the Netherlands due to a reduction in the value of liabilities as a result of wider credit spreads. This was partly offset by fair value losses in the U.S., mainly from the reduced value of investments and unhedged risks, while the hedges were effective for the targeted risks. Other charges amounted to 1.1 billion euro. A lion's share of that is from assumption updates in the U.S., which I will explain in more detail on the next slide. As part of our regular processes, we review assumptions for the Americas in the first half of the year. This half year, we have implemented substantial updates for key assumptions in our U.S. business. Given the decreasing interest rates in the United States, we have lowered our long-term interest rate assumption from 4.25% to 2.75% and have lowered the assumptions for separate account bond fund returns accordingly. This 150 basis point decrease in the long-term interest rate assumption led to a total pre-tax charge of 473 million euro. The updated assumption implies that we are assuming a reinvestment yield, including credit spread, of approximately 4% in 2030, which compares to the current quarter reinvestment yield of 3.2%. Secondly, we have strengthened our life reserves by updating our assumptions for premium persistency and mortality, leading to a pre-tax charge of €234 million. The pro forma actual to expected claims ratio for the last year using the new assumptions is slightly less than 100%. The adverse experience of the past years is thus well reflected with the new assumptions. we will continue to monitor claims experience and its drivers closely, including COVID-19, which led to adverse experience in the first half of this year. Thirdly, we have reviewed the long-term care assumptions. Despite evidence of morbidity improvement and our favorable overall LTC claims experience, we have decided to move to a more conservative assumption. We have reduced the morbidity improvement assumption from 1.5% to 0.75% annually over the next 15 years. This led to a pre-tax charge of 81 million euro. Let us now switch focus and move to capital on slide eight. Here you can see that the small and C2 ratio for the group has decreased slightly to 195%. This leaves the ratio still at the top end of the target range of 200%. Expected return, net of new business strain, had a contribution of 9 percentage points, which was more than offset by market movements of minus 18 percentage points. Model and assumption changes had on balance a negative impact of 2 percentage points on the group solvency ratio. This included the lowering of the ultimate forward rate in the Netherlands and assumption updates in the U.S. Lastly, one-time items had a positive impact of 5 percentage points on balance, as management actions more than offset adverse mortality in the U.S. Now let's turn to slide 9 and briefly discuss the fallency ratios of our main operating units. In the U.S., the RBC ratio decreased to 407%. Falling interest rates were the primary driver, with the U.S. 10-year treasury yield coming down about 125 basis points. Furthermore, the ratio was affected by lower equity markets and adverse credit impacts as rating migration and defaults reduced the RBC ratio by 14 percentage points. In addition, the adverse mortality experience in the US had a negative impact of 10 percentage points on the ratio. Management actions taken in the US had a clear positive impact. We have refined the implementation of the new VA framework and restructured a captive reinsurance company. Both led to one-time gains, and more importantly, will reduce the interest rate sensitivity of the RBC ratio going forward. In the Netherlands, the Solvency II ratio improved from 171% to 191%. This was mainly driven by the positive impact of interest rate movements. This is due to our over-hedged position on a Solvency II basis. credit overall had a neutral impact as the positive effect from the higher IOPA VA was offset by the rising credit spreads on assets, including mortgages. In the UK, the Solvency II ratio decreased to 154% at the end of the first half year. The decrease was mainly driven by lower interest rates. Next, I would like to talk about credit migration on slide 10. In the current economic crisis caused by the COVID-19 pandemic, the risk for corporate defaults is increasing. Consequently, we have seen rating agencies taking action. For an insurer in the U.S., RBC capital requirements for bonds are based on NAIC rating classes, which are linked to credit ratings from rating agencies. So far, the impact from rating migration has been manageable. We have seen rating actions on about 16% of Transamerica's fixed income portfolio, which led to an increase of required RBC capital of $47 million. This corresponds to an impact on the RBC ratio of 9 percentage points. In the table on this slide, you can see that two-thirds of the impact on the RBC ratio is from investment-grade bonds in NAIC Classes 1 and 2, where about 94% of the U.S. credit portfolio is allocated. As the economic crisis is evolving while we speak, we expect further impacts from rating migration and credit defaults in the coming months. However, it is impossible to quantify a potential impact given the current uncertainties. Now let me take you to slide 11 to discuss our holding excess cash position. U.S. remittance largely came from the intermediate U.S. holding company and was financed by affiliate notes from the life companies, which we use for liquidity management purposes as part of our normal practice. Had the U.S. life companies paid these dividends directly, then the RBC ratio would have been 386% instead of the reported 407%. Our plan entering the year was for the U.S. life companies to pay about $900 million in full-year dividends to the U.S. holding in the second half of this year. Half was intended to finance the reduction in the affiliate notes, while the remainder was expected to be remitted to the group. However, this year we prioritize strengthening of our balance sheet, also in light of the impact of the COVID-19 pandemic on our capital generation in the U.S. We also face the risk of declining equity markets, as well as further rating migration and defaults. Because of these risks, the U.S. light companies are expected to pay only $450 million to the U.S. holding in the second half of this year, all of which will be used to reduce the affiliate notes. We therefore expect no remittances from the U.S. to the group in the second half of 2020. By the time we report our second half results, I expect that a balance of about 200 to 300 million U.S. dollars will remain under the affiliate notes, similar to the amount at the start of 2020. We expect that this will reduce over time. Moving on, we intend to use existing holding excess cash to reduce our financial leverage. The coverage of fixed charges on our financial leverage by the remittances from our subsidiaries is not where we want it to be. This is especially so in light of the volatility of the recurring remittances from our units and exacerbated by the current environment. We are therefore prioritizing deleveraging. We will use part of our holding excess cash, which currently stands at 1.7 billion euro, to repay 500 million U.S. dollars of senior debt in December and do not intend on refinancing it. We will update you in December on our new leverage target, but the direction of travel is clear from the deleveraging we are announcing today. Besides deleveraging, we also expect a cash out of €141 million in the second half of the year as a result of the recently closed expansion of our joint ventures with Santander. Consequently, holding excess cash is expected to fall to the lower end of our target range, which we took into account in our decision around the dividend, which I'll discuss on page 12. Given the impact that COVID-19 is having on our business and our desire to strengthen the balance sheet, we have concluded that it is in the best interest of the company to not pay out the final dividend for 2019 and to rebase the interim dividend. We are reducing the interim dividend from $0.15 per share last year to $0.06 per share in 2020. As a result, we no longer expect to meet our targeted dividend payout ratio for the period 2019 to 2021. Together with the adverse developments in our capital generation and profitability in the first half, this means that we have to withdraw our financial targets. As Lard mentioned, from here on, dividends and other means of capital return to shareholders will be based on a regular assessment of the company's financials subject to customary governance. We plan to provide new financial targets and details on our capital allocation plans at our virtual capital market day on December 10th. With that, I will pass it back to you, Lord, for the wrap-up. Thank you, Matt.

Let's move to slide number 14. Let me round out by underscoring once more that it is my ambition and that of my management team to transform Agon into a more focused, high-performing group that with a balanced portfolio of businesses that is generating reliable free cash flows and delivering sustainable and attractive shareholder returns. We are focusing on four areas to achieve this ambition. 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 would like to open the call now for your questions. And in the interest of time, I kindly request you to limit yourself to questions so that everybody gets a chance to speak. So operator, please open the Q&A session.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll now take our first question from Farouk Hanif of Credit Suisse. Please go ahead.

Hi there. Thanks very much for your presentation. Just two questions, as you said. Firstly, when you talk about countries and focus, I just want to understand a little bit what's on the table and what might be off the table. So a lot of this question is, you know, the structure of the group would, you know, a US-focused business with a totally different capital regime, you know, maybe a bigger impact from IFRS. Is it on the table that you look at the actual, you know, a breakup of the group? That's question one. Question two is on the leveraging. and you've talked about the $500 billion in senior notes, what kind of metrics are you looking at? Where do you want to get to ultimately on leverage? Thank you.

Yes, Eric, I suggest that I take the first one, and then you can take the second one, Matt. So the first one, what I've said today is that, you know, if I look at the total compositions of groups, we are present in 20 countries. I believe that the group can benefit from more strategic focus, and we need to take very disciplined capital management decisions and portfolio decisions. And, you know, at the Capital Markets Day, we're still working through our thinking there. The Capital Markets Day will give you a framework. You'll have to think about that. When it comes to the U.S. and other markets, which I mentioned, I mean, the U.S. is a vast, very big, large market for us. It's an established market, like the UK is, like the Netherlands is. We have a good brand there. We have a broad set of products there. We have multiple business lines in the U.S., and I believe that with a renewed focus on performance, on improving the commercial momentum, and driving profitable sales, I think the U.S. market for Agon has a great opportunity to create a lot of value, just like You know, I said I was talking about the U.K., the Netherlands, the asset management business in Spain and Portugal, the relationship we have with Santander, and also developing markets, large developing markets for the future, for future growth like China and Brazil. However, I did say we have 20 countries. And the question is, you know, how do you create more strategic focus to the group to ensure that you can create longer-term, create more value for stockholders over time.

Farouk, with respect to the leverage ratio, I think the analysis behind that's really still taking place. When we've guided you today to the fact that we are going to take out $500 million of U.S. dollars of debt in December, we're indicating really a direction of travel here We definitely want to reduce the risk profile of Agon, and we do want to reduce financial leverage. However, the precise implications for things like the leverage ratio target or other aspects of our capital policy are really still being worked through. So we would intend to update you in the capital market today in December.

So just to come back on the scope of the group, my interpretation of what you said is, look, it's not an immediate priority to – split up the U.S. or list it, but you are looking at the number of countries you're in the focus. Is that the correct interpretation?

I believe we need – I'm sitting here for the long-term value creation of the group for stockholders. And I think it's in the best interest of stockholders to continue the activities I just outlined because I believe there's a lot of value to be created there. At the same time, I'm saying that we're in 20 countries, and therefore we need more strategic focus. I think the group can benefit from that. And we're working through that, and we'll give you more clarity on the framework and portfolio decision framework that we're going to take at the end of this year, the capital markets day.

Excellent. Thank you very much. Our next question comes from Cora Clewis from ABN Ammo Bank. Please go ahead.

Good morning. I've got a couple of questions. First of all, about the assumption review. You did the review of the Americas, of course, in the first half of the year. It's good that you aligned some of these assumptions well. The question is more about Europe and Asia. Also an assumption review there in the second half of the year. Could you comment a little bit on that and might be expected at Q4 results or might it also be happening at the Capital Markets Day and what are the items you're really looking at? So that's on that side. Secondly, on the U.S., maybe a question for Lard. Of course, physically a little bit more of a challenge for you to look and analyze the U.S. business in the first half of the year. But could you give your comments and views, what you've learned, and especially on items like long-term care and federated annuity business, what's your view on that part of the U.S. business as well?

Thank you very much, Cor. All the assumption updates, Matt, maybe, and then shall I start first with the impressions for the U.S.? Yeah, so, indeed, I started in the middle of the pandemic, so I was supposed to be in the U.S. for quite a long time, actually. It only was physically there for a week after we had to return back because of the, you know, the federal restrictions that were imposed at that time. But I have been able to conduct many, many, many, many meetings with our colleagues in the U.S. and to get myself familiar with U.S. products and with the U.S. business. We have two – to remind you first, we have changed the organizational structure of the group to really focus more on two distinct areas. One is the workplace solutions business, which is a retirement business, retirement plans and benefits and the like and voluntary benefits. And then we have another division set up, which we call individual solutions, and that's the business that basically sells the annuity business but also final expense business firm life, whole life, universal life products. We have also decided to appoint two new CEOs in those two business lines. So the two business lines there now have new CEOs, very talented leaders that are, you know, have appointed there to ensure that we drive the performance and the commercial momentum of the company. If I look at the product portfolio, you know, of course with these low rates, we need to be realistic that the living benefit in the variable annuity book is obviously something which is quite under pressure in terms of profitability while still maintaining good consumer outcomes. And as a result, we have adapted the product range in May, and we are going to continue to navigate through the product portfolio and annuity business to ensure that we redesign products, develop new products, and focus sales efforts, for instance, more on fixed index annuities and also developing other kinds of products like registered index annuities and the like. If we look at the, let's say, the other piece of the individual solution, business term life, we actually were quite successful in selling continuing sales term life. We basically had 20% uptake in sales, which is because it's certainly in this environment. Also in the IUL business, I just alluded to the change in underwriting mechanics that we use to allow to operate and to continue that business in this virtual environment. So that is something that we've been focusing on. On the retirement side, what we basically have seen after the COVID pandemic sunk in is that the number of RFPs out there for new business or the number of employer sponsors that have that put their business up for RFP have really dropped quite a bit. So there's not much commercial activity there, which has actually a positive and a negative side. The first one is on the negative side, you cannot get more sales in. That's one thing. However, the positive is that the retention levels are also good because sort of business is more sticky as there is just less, you know, fewer and more sponsors that are putting their business up for RFP. So I would say that the last years, there's been a lot of investments made in the retirement business. The integration of the commercial acquisition and the retirement business and workplace solutions business is now behind us. That's done. So I think we've invested a lot in traditional solutions and making sure that doing business with us in that area is more flawless for our partners. And we are well set to drive up growth the moment that it is possible again. So with that, you know, I think let me stop here. As for the U.S., we can talk a lot about the commercial activity there, but let us stop here.

Thanks, Corey. With respect to the assumption review, the first half assumption review, as we said, is taking care of the U.S., also Transamerica, like Bermuda, the high-net-worth business that we have in Asia. Now, we normally do the European assumption review in the second half of the year. And it's really critically important that we take the same diligent review of the process that we did for the U.S. in the first half, also taking into account the concerns of the market. So with respect to when we announce something, I think it would be unlikely that we would say anything about assumption review in Europe for the capital markets day in December. I think that would be something for the year-end earnings release.

Wonderful. Thank you. Our next question comes from Michael Hutner from Barenburg. Please go ahead. Fantastic, thank you. I just wondered on that cash at year end, whether you could talk me through the moving part. I heard the figures, but really I wasn't typing at the same time. I'm not focusing. Of minus 550 million, which is the dividend holding cost, minus 141 million to Santander, and I guess minus 455 million to the debt repayment service. I deduct that from the 1.7, I get to 0.6. And you said you'd be at the bottom end of the range, 1 billion. So if you could help me on that, it'd be lovely. And then the second, the junior colleague is a fantastic guy. What I remember most from him is his key question is always, what is the number of shares? In other words, is there potential valuation to come from capital increase? And I just wondered if you can explain a little bit your thinking on that. And here I allude to the fact that you did have a registration statement. I was sure it's a kind of normal event in July, but that registration statement does have the possibility of issuing shares in the AGMNB. Thank you.

Yes, I mean, Matt, if you can take Michael through the numbers on the cash in the holding. But before we do that, maybe get to your question about I didn't quite hear it, to be honest. So can you please repeat your other question?

Well, basically, your new employee, Duncan... It was about Duncan, I think, but... Yeah, yeah, no, no, no.

Well, Duncan, he's now in the booth, right? And his key question is always, what is the right number of shares? Now, you have a self-registration to issue shares in Aegon NV, and I just wondered if there's a risk or possibility that all these reviews will lead to a capital increase.

Thank you.

I understand the question. Well, first of all, on the filing that you're referring to, the Form 3, that's actually something quite boring, to be honest. We regularly issue dollar paper in the U.S. market. Last year, for instance, we issued a $925 million U.S. dollar Tier 2 instrument under the shelf-to-shelf program. This is just a program that we need to maintain and perform a yearly update of a registration document, so it's actually quite a boring thing. About your other point, I mean, can I just point out to you that to remind you that today we're announcing a dividend, actually, and that we're also saying that we want to prioritize repaying debt, and actually that at the end of the year we're going to repay half a billion in debt. I mean, that to me is a clear answer to, you know, do you have any plans at this point for this? The answer is no. I mean, you know, we're announcing a dividend and also prioritizing deleveraging.

With respect to excess cash at the holding, I'll begin with a beginning year balance. So we had about 1.2 billion euro excess cash in the holding at the beginning of the year. We will expect in about 830 million of gross remittances from the various business units throughout, and that would be for the entire year. Take out about 300 million of holding and funding expenses. And then the key points on the other pieces here, we did get a – we should get the proceeds from the divestment of our Japan business, so that's about 150 million euro. We also expect about 250 million euro of capital injections into the business units, which are – which include the funding of the Santander expansion. We have about 120 million in common share dividends based on the six cents per share that we've announced today. And then the change in the financial leverage is that $500 million U.S. dollar senior, and that gets you to something over a billion in the holding excess cash at the end of the year. Good.

Thanks so much. Our next question comes from Farquhar Murray.

Just two questions, if I may. Firstly, on the dividend rebate, you seem to have rebate to a level that you can sustain against plausible stress outcomes. But could you just outline what needs to happen for you to move higher from those levels? Is that just a matter of moving beyond the kind of COVID-19 uncertainties? Or are we looking at a more sustained recovery in US remittance? This might actually take till 2022. And then secondly, on the assumption changes, Please, could you quantify the reductions in the headroom you referred to on the asset adequacy and premium deficiency reserves? And could you just update us on where you stand on those currently? Thanks.

Thank you, Farquhar. I will take the first question and the mentor will take the second. Okay. So on your trajectory question for the dividend, as I said during my opening remarks, we realized that we should over time – this business should all the time be able to produce more than the current level of dividend. But for now, we feel this is the right level of dividend as we want to prioritize deleveraging, we want to strengthen the balance sheet, and we want to indeed navigate well for the COVID-19 pandemic. We're working on plans to improve the operating performance of the company, and with that, over time, to increase the free cash flows of the company. And, you know, provided we're successful in executing those plans in the coming years, that will put the entire business in a place that we can produce higher levels of capital return from dividends and buybacks, for instance. But more details will come later on this.

With respect, let's say, with respect to cash flow testing headroom and PDR headroom, just in general on asset adequacy testing, this is an annual test that we run at the end of the year. We have done a number of legal entity restructuring in the U.S. over the past several years, and this has helped us to improve our capital ratio and get some additional cash flow testing sufficiency. We also have additional legal entity mergers. We've talked about this before, the merger of T-LIC and T-PLIC that is scheduled to happen on October 1st of this year. We are also collapsing an embedded value captive reinsurance company at the same time And at that moment, we further plan to optimize the legal entity structure in the U.S. All of these things are things that benefit the cash flow testing sufficiency. However, the assumption changes that we have made in the first half of the year erode that to a certain extent. But at the level of interest rates that we're currently at, we do not expect to have to put up additional cash flow testing reserves at the end of the year, again, assuming that we get the TLIC-TPLIC legal entity merger done. completed by the end of the year. With respect to the premium deficiency reserve testing, again, this is an annual test, and that's one where we're going to be close. Again, the change that we have made to the morbidity improvement assumption has eroded part of that headroom, but we do anticipate being able to take some management action by the end of the year to be able to reduce that risk.

Okay, just to the point, do you have any sense of the magnitude of erosion you're talking about there?

Yeah, again, this is something that we're going to defer to the end of the year because it's the full cash flow testing runs taking into account the legal entity mergers. So we're going to wait until year end to talk about that.

Okay, that's fair. Thanks. Our next question comes from Ashik Masadi from JP Morgan. Please go ahead.

Yeah, thank you. And good morning, Lord. Good morning, Matt. I have two, three questions. So first of all, I mean, we are in an interest rate environment, which I would say we haven't seen in past in U.S. So how confident you are that the current interest rate is now fully reflected in the stat accounts? I mean, I'm not very much keen on the access, but in terms of stat accounts, do you think that if interest rates remain here for five years, 10 years, especially the U.S. one, you will not be taking charges in the future on interest rates, at least in the stat account. So that's the first question I have. Second question, you keep on mentioning that you want to reduce the risk profile of the company. Now, what does that mean apart from deleveraging? I mean, do you plan to reduce the credit risk? Do you plan to take interest rate hedges? So any thoughts on that would be very helpful. And thirdly is, I mean, how should we think about cash close cash state capital generation at the moment in light of new interest rate environment in US and in Dutch businesses. I mean, in past, I think US capital generation was about $900 million. Dutch capital generation was about $350 million. But because of falling interest rates, because of your reduction in risk profile that you're talking about, how should we think about that normalized cash generation profile going forward? I'm just trying to get a bit of sense as to what sort of free cash flow you can generate in the long run. Thank you.

Yes, thank you very much, Ashik, for your questions. I'll take the questions that you directed to me about the risk profile of the company, and Matt, I'll defer the other questions to you if you don't mind. So on that, I'm not going to give any specifics at this point, but If you take a step back, what I'm trying to do is the following. If I look at the company, I think the performance really needs to improve, the operating performance. Secondly, for that, a number of things need to happen. I need to install a different management culture, creating a high-performance environment, and ensure that, you know, we are creating – we're getting free cash flow generation that moves up as a result of better management activity, if you will. So that's number one. I also see a lot of volatility. You see volatility in capital ratios, but also the entire picture, in my view, creates a lot of volatility, which I want to just make more boring, if you will. Maybe a weird word for this, but I think I want to create a much more quiet picture, if you will, and that's part of the effort that we're going to do. The other thing is that, yeah, today we've announced a couple of things around the balance sheet because we really want to ensure that we take a step back, rebase the dividend, create room to delever the company, and also to take actions to ensure that the overall profile of the group becomes more predictable over time and focused on generating free cash flow through high-performance management activity in the markets where we operate, and further, of course, reducing costs. if you will, the strategic focus, ensure that you create more strategic focus, if you will, for the group as a whole. That's what I aim to achieve there. With that, Matt, over to you.

With respect to the impact of sort of the low interest rate environment on capital generation in the U.S., what we said before and still holds true today is that we reinvest about $5 billion worth of our general account. We have to reinvest that every year. And to the extent that you have a gap between your, let's say, your new money yield and your fact book yield, that's going to create a drag. And right now that drag is standing at about 109 basis points for the U.S. general account portfolio. So just in general, call it 100 basis points. You're talking about a $50 million reduction in pre-tax earnings, capital generation, all sort of the same thing. But then if the next year that level of interest rates persists, then it compounds because you've got another $5 billion that you have to reinvest. So 50 goes to 100, goes to 150, and so on. So a prolonged low interest rate environment creates a drag on our earnings. I would also say that it's not just in the U.S. We do have a sensitivity to interest rates within the Netherlands. And there, if you have a one basis point drop in interest rates, you end up with about a 1.5 million annual impact on capital generation going forward. And just to remind you, we do have quite a significant UFR drag that's going on in the Netherlands. It stands at about 275 million euro annualized today. But that's just a reflection of where interest rates have come. But a low interest rate environment is very difficult to us, and it's one of the reasons why – we are being cautious here in rebasing the dividend to that $0.06 a share so that we can make sure that it's well covered by cash flows out of the businesses, even assuming a reasonable level of adverse scenario.

And just one question, one more question I had.

Yes, on the capital generation. You know, I answered this in a little bit different way. I mean, Normalized – you've talked about normalized capital generation, which is still quite an important metric for us, and it definitely has reduced in the first half of the year given the impact of mortality on our U.S. life business. But normalized capital generation works better in a normalized time, and that's not where we are right now. We are in a very volatile market. We do not know where mortality is going to go. We have some estimates. We've run scenarios on adverse mortality and claims experienced. But also we are going to be taking real impairment losses, real defaults on bonds through the statutory accounts. And that's real money. That is real cash that we have to take into account. So I'm not going to make a comment on your level of normalized capital generation at this moment in time. It has way more to do with the real cash that is being generated out of the businesses. And now it is being influenced quite a lot by tumultuous markets, potential for continued declines in equity markets. credit defaults, credit migration, additional mortality. So we're going to be a little bit cautious on talking about future normalized capital generation.

That's a great idea, and many thanks for your answers. Our next question comes from William Hawkins of KBW. Please go ahead.

Hi, thank you very much. Matt, what you were just saying to Ashley, because partly I was also going to ask about the capital generation. So I don't want to ask the same question again, but I'm just trying to get clear in my mind. You know, your 4.1 billion three-year target, I mean, that was an anchor point for Aegon. And I can see why you've had to adjust your cash and leverage views. But to me, it's a little bit more fundamental that you seem to massively have rode back from that number. So just to be clear, we seem to be annualizing now below 1 billion euro and the direction of travel for that number is still negative. And I just wanted to sort of make sure I'm clear. The driver of that very rapid deterioration is the UFR drag that you mentioned and then the ongoing rollover risk in America. I suppose if I'm right about the question I wanted to ask, you made a couple of references, I think Larve made a couple of references to management actions also boosting figures. And you've not really talked about that so much in the past. And so I wanted to check, have management actions also been boosting figures your historical normalised capital generation figures in a way we haven't seen? And if so, by how much? Or is that comment about management actions more just referring to the dividend up streams and the rest of it? And then secondly, I'm sorry to come back to this point about rationalising the 20 regions. But I mean, just as a comment, I'd like you to respond to. I respect what you're saying on that. But the three big regions, which you seem pretty committed to, even before we get on to asset management, are generating more than 95% of your operating earnings and capital generation. So it would seem to me that anything you do in the other 15 to 17 regions is really going to be marginal to Agon's position. And so what I just wanted to check with you is, am I missing the point on that? Do you actually think that there's stuff you can do in these smaller regions that can actually become financially material for Agon? Or is this more just about maybe quite reasonably just wanting to reduce your distractions? You know, you've got three big operations that you need to focus on, and you don't need to be focusing on all these other areas. And so even if they're financially relevant, you need to get them off the table so that you can really focus on the stuff that matters.

Yeah, well, good morning. Let me take that first, Matt, and then that last piece first. I understand your question. Yeah, you're right. I mean, I think we should limit our distractions. Let's be perfectly clear and focus our efforts on where it matters. And that's what I think the real important message is from trying to get across today. With strategic focus, I mean do not be distracted and focus on things that move the needle and really ensure that you drive your performance up and get better and stronger streams of free cash flows, which will provide all kinds of opportunities for capital returns and other purposes. So that's a large piece of this. And, you know, more focus also on markets, you know, management time, attention, et cetera, makes you a company with a hop in your step, and that's what we need to become.

Matt, with that, with respect to the capital generation target, you're absolutely right. I mean, when we set out the 2019 to 2021 targets, we really anchored on that $4.1 billion of normalized capital generation, and that was really supported by effectively remittances from the U.S. And that's sort of a shorthand of saying that, you know, we talk about our payout ratio on normalized cap gen, but really it was anchored by normalized capital generation in the U.S. and the level of remittances that they were going to be able to pay to the group. But, again, we are not in a normal situation here. So normalized capital generation is going to be, you know, eroded by things like credit defaults, things like additional mortality. So that's really why we have to back away. That's really the reason why we have to back away from that target.

And, Matt, sorry, just allow me to ask one core question. How are the historical figures?

The short answer is no. The short answer is no. Management actions typically are things that would either improve a solvency ratio or improve a headroom, something in that space, but it usually is more negative on normalized capital generation. A good case in point would be the longevity reinsurance deal that we did in the Netherlands where we basically get an upfront capital benefit, but it costs a bit. in terms of normalized capital generation going forward. So it is a bit the opposite. I think what you may be – what Lard, I think, was referring to was when you take some management actions, and say we've done this in the U.S. business, it has allowed us to pay more dividends than what, let's say, the normal earnings of the business would be able to afford. A good example of that, you may remember 2017 when we sold the Coley-Bowley business in the U.S., it ended up generating about $700 million of additional capital, which the U.S. was able to repatriate to the group, which we used in part to recapitalize the Dutch insurance organization. So there is a link between management actions and remittances. But what Lard is really trying to say is that we want to make sure that we have the remittances coming out of the U.S. to be based on real earnings, real efficiency, real – stuff that we're doing on the enforced business, and then we'll be transparent on what the impacts of the management actions are going forward. And sometimes they can result in a special dividend or whatsoever, but we'll be transparent on that.

That's great, gentlemen. Thank you. Good luck on the journey.

Our next question comes from David Modematon from Evercore.

Please go ahead. Your line is open.

Good morning. just a quick question for large just on, on strategy, um, and specifically on the UK and just how you think this business fits into the, to the group. Um, you know, it does sound like this is strategically important. Um, but I guess just sort of how you think Agon is positioned in, in the market there. Um, and I guess why, why you wouldn't consider, um, doing something more, um, more drastic there in terms of freeing up capital. Second question just for Matt, I guess sort of a two-part question just in the U.S. First one, are you getting any indication of the impact that the Iowa regulatory review will have on capital levels in the U.S. as we head into the end of the year when I think that review should end? And second, just on the PDR testing for the long-term care book, I guess it sounds like it's going to be pretty close. I'm just trying to get an understanding of what exactly happens process-wise when that margin is breached.

Want to cut? Should I first do the U.K.? Okay. On the U.K. business, David, good to hear from you. On the U.K. business, yeah, I think we're – the U.K. business is a business that is, first and foremost, operating in a large market where a lot of assets need to be managed. And we have built on the back of the Scotch Equitable business, we've built a platform business, which is the leading platform business in the U.K. And there's a lot more for us to do. The company is doing well. The movement from, let's say – the in-force book, which over time is maturing, and at the same time, you know, the capital light business that we have with this platform, the service that we have for pension plans and the digital solutions that we offer there, we think that we're very well positioned to grow that business further and also to drive up the earnings and, as a result, making good returns. So, yeah, we believe there's a lot more room for improvement and for creation of value, and that's why we believe that the U.K. business is well positioned to capture the opportunity there.

With respect to the Iowa review, that is correct. They've just begun their, we say, quinquennial audit once every five years. I would seriously doubt whether this thing is going to be done by the end of the year, but there's really no update on this one. Yeah, not much to say about that. For the PDR, if you have a breach, so on cash flow testing, if you breach cash flow testing, you have to actually set up reserves, but there is a gradient period where you do it over time. Actually, on the PDR side, I don't know if that's immediate or if there is a gradient. We will come back and check on that one. But if we were to breach it under current sort of circumstances, the amount would not be very much.

Got it. Thanks. And if I could just sneak one more in just on local capital levels across the group. Laura, do you think that those need to be increased from the current ranges or maybe the ranges tightened up at the top end in the vein of trying to improve the financial strength of Avon?

Well, the more important thing, David, to be honest, that would be more my priority rather than the levels itself is the volatility of them. So if you just look back at, for instance, the Dutch ratio, the volatility of the ratio has jumped around quite a bit. And we know it's a mechanical thing partly, but we need to address that and make sure that it becomes more stable. So rather than the levels of capital themselves, as I said in my opening statement, the levels Regulatory capital levels are satisfactory. That's not the point. It's more the volatility around it that I believe needs to be addressed.

Okay, great. Thank you. Our next question comes from Albert Pleon from ING. Please go ahead. Yeah, good morning, also Albert Pleon from ING. Yeah, a few questions from my end. The first one on the deleveraging. If we take one step back, so basically pre-COVID, we have taken the same kind of conclusion that leverage is fundamentally too high, because I'd like to understand what is structural there in terms of deleveraging needs and what is it you like, the new world now given COVID, so to understand a bit of that. And in fact, trying one on leverage as well is on IFRS 9 and 17. Has it played a role or factor in the decision also with your wording for the time being? There's also an element there.

And then one question also in light of the rebating of the dividend, can you confirm whether the pay grant association is completely debt free, so no leverage there?

I believe that is the case, but it would be helpful. And my final question is on the holding cash buffer.

Thanks for the explanation for the second half.

I mean, the buffer, I think we can conclude that you still feel comfortable with the range, but should we also, given the COVID situation and the ongoing uncertainty, would you rather like to move to the higher end in, let's say, 2021-22, or is that not needed in the one billion? This is a fine level for you. Thank you.

Yeah, so I'll take the first one, and then if you take the other points. Yeah, Albert, on the – well, don't forget that – let me first say U.S. rates, for instance, are now more than 200 base points lower than they were a while back, for instance, in the second half of 2018. So rates have gone down. Rates have gone down, and that changes the outlook on capital generation, and therefore the views on leverage change. you know, because rates down puts pressure on the coverage of fixed charges of the financial leverage by the remittances from the subs, which is not where we want it to be. And especially, you know, in light of the volatility of the recurring remittances, which I just highlighted from the units, as we have seen in some years, in recent years, that we believe that this volatility is exacerbated by the current environment, and as a result, we're just prioritizing to deliver the company strengthen the balance sheet, and, you know, secondly, focusing on performance improvement, efficiency improvement, and as a result, getting the free cash flow generation of the businesses up. As a result, the remittance level is up and more reliable in the future, and as a result, we, over time, to create a better pool for improved capital returns, dividends, and the like.

Let me pick up the IFRS 917 factor. I would say IFRS 917 is not a direct driver of a move to de-lever. However, the low interest rate environment is going to make an impact on our equity under IFRS 17. So it is a bit of a consequence. In other words, IFRS 17, capital, IFRS even under the current standard, It's really just a little bit different lenses looking at the same situation. And the situation that we find ourselves in is low interest rates. So by deleveraging, that will take some pressure off the IFRS 17 conversion when we do that in 2023. With respect to the Agon Association, yeah, there's no bank debt remaining on that one. So they've done a good job taking the debt out of the company over time using the dividends that we've been paying them to do so. At this moment, there's no bank debt. On the fourth point, are we comfortable with the level of holding excess cash at a little bit above a billion? No. We would rather have it up more toward the end of the – up toward the top of the target range, and we are going to try to work that up. So when Laura talks about decreasing the risk profile of the company, it also means establishing a bit more cash buffer. So as we look forward, even under – an adverse set of scenarios under COVID-19, we still see that that excess cash is going to be growing over the coming period. Again, even in a reasonable set of adverse scenarios.

Thank you, and apologies for the four questions. Our next question comes from Jason Talambusi from KBC Securities.

Yes, good morning, gentlemen. Nice to see you both, Lars and Duncan, on this new challenge. I can only congratulate you, by the way, on the new direction you're tracing for the group. I've got three quick questions. The first one is, we talked about exiting countries. I would like to have your thoughts on U.S. We mentioned before the Boli Koli. Do you think that you're happy with what you have in the U.S.? ? or would you consider to do any disposals at some stage, of course, now not being the time, and will it be part of your strategic review? And also within this question, how do you see the balance of the US business versus the rest of the group? I mean, you're predominantly a US business. We already discussed about splitting the group or other things with the previous questions, but just I would like to know, as you're exiting more countries, you are increasing that imbalance. What are your thoughts? The second question is just quickly, Matt, around the U.S. I think we had discussed it back in May. You had the new product launch with PCS. Maybe you mentioned Anaptic, but I didn't hear it very well. How is this going on? Have you launched new products? And also, there is talk about new investments. I just would like to understand it because I understand the higher expenses, given where sales are, but are there new investments further in that area or not? And the third thing is just quickly on the UK, solvency 2 at 154%. I know your lower end of the range, 145%, but are you happy with it?

Yeah, good morning, Jason. And I'll start with the first question you answered, and then Matt, can you take the other one? So let's start with your point about strategic focus. You know, if you take a step back, what I would like to achieve over time is to build a well-balanced group which is performing well, which has multiple pools of remittance capability, cash flow growth on the back of strong management focus and, you know, selling the right product, being efficient, and strong management activity. That's what I aim to achieve over time. That's not where we are today. We realize that. I recognize that. But that's what we're going to work on for the coming years to get right. I want to create more strategic focus to allow us as management to just focus, what I said earlier to Will, to focus on where it moves the needle. And I'm absolutely convinced that when we do that well, that we will find opportunities. And also in those businesses, indeed, we could review areas where we want to grow, areas where we do not want to grow. So you will get more granular in the way you're going to deploy your strategic thinking in the market that are your chosen markets and where you're looking into. The purpose of it all is to create, in the end, a trajectory for this group where this group becomes balanced with strong free cash flow generation from multiple sources of remittances and, as a result, create a more balanced group overall. That's the thinking behind this. Okay.

So, Matt, could you take some of the other questions, please? Yeah, let me pick up the new product launches in the U.S. So, first of all, we have done some repricing to the term product. And if you look at sort of half year over half year, that's been effective. We've been quite comfortable in repricing certain sales, pricing sales, we say. But we saw actually term sales, even in a COVID environment, up about 30%. over the prior year period, and again, due to firm repricing. We are introducing a new guaranteed minimum accumulation benefit in our variable annuity product line to compete with what are called RILAs in the second half of this year. Next year, we will introduce our own RILA, again, probably in the second quarter. Generally, these products are designed to produce a lower risk for the company offer a bit of principal protection. But again, a lot of these products need to be a bit redesigned as a consequence of the big drop in interest rates. So like on variable annuity product, as an example, you know, given the level of interest rates, we don't want to be selling so much of this business until we can reprice and get new product. Oh, your last one was new investments and retirement plans. Yeah, we are making technology investments basically to improve customer and advisor experience. And those were things that were slated. As we came into the year, we're expecting to invest quite a bit in U.S. business, which we have done on the technology side. But given the COVID-19 environment, I think Laura has mentioned across all businesses, including the U.S., we are going to have some kind of a major expense initiative here to increase the efficiency across the board. I leave the point on the U.K., I think. Oh, sorry. The U.K., the 154%. Am I happy with it? You may have noticed that the U.K. didn't actually pay a dividend in the first half of the year. This was, I think, more prudency on the part of the word there. And also the PRA has been outspoken about being very, very cautious on paying dividends. It actually did pay it, by the way, in the beginning of July. But 154 is down near the – it's near the bottom of the range. We'd like to see it a little bit higher, but this is not actually a big concern for us at this point. I think I'm more concerned about getting expenses out, making sure that we've got that co-funds integration fully locked down, and then the U.K. strategy going forward. That's the thing that we're working on there. I'm not so much concerned about solvency ratio in the U.K.

Many thanks. Our next question comes from Fulin Liang from Morgan Stanley. Please go ahead. Your line is open.

Thank you. Good morning. I've got two questions. The first one is just wonder how are you going to protect your U.S. RBC ratio? Because if you look at the RBC ratio right now, it is above your bottom range of the target range, 350. But when I look at the making migration and default seems like it's not fixed yet. And also your portfolio is not completely new to equity market movement. So 386 versus 350 doesn't sound a bit of much margin to me. So just wanted to see if the market actually deteriorates from here, what could be the major actions to protect your U.S. RBC ratio? So that's the first one. The second one, I think the question being asked before, just want to follow up. On the point of improving the company's risk profile, could you add some color on specifically on the liability risk profile? What do you like? What you don't like? For example, do you like longevity risk? Do you like mortality risk? Do you like the fee and risk? That kind of thing. Thank you very much.

Hi, Fulin. Thank you for your questions. Let me take the last question, and I'm asking Matt to take the first one on the RPC ratio. Fulin, as I said earlier to Ashik on the call, I'm not going to go into specifics at this point. What I just think to do is create a situation where the company comes to, you know, all facilities addressed, where debt is taken down, where the overall trajectory of the company is driven by, management performance and activity to drive efficiency up, to drive commercial momentum up, to focus strategically on markets that we think we can create a lot of value in the future, that we focus our attention in a very granular manner on the activities that we can undertake to improve the overall free cash flow trajectory for the company. And those are the key things that I would like to highlight here. More to come on this, because I understand you have questions on this, but more to come on this, but give me a bit of time to be more granular about this, likely more on that by the end of the year.

So, with respect to protecting the U.S. RBC ratio, so to be clear, again, even in a COVID environment, we feel comfortable enough with the solvency ratio in the U.S., to be able to take out a $450 million dividend out of the life companies in the second half of the year. So that gives you a bit of a measure of, you know, even under a reasonable set of adverse scenarios, we still think that it'll be possible to take out that 450. So, but let's say, and again, that's just assuming, you know, a lower level of equity markets, continued and even higher credit defaults and credit migration, the continued low level of interest rates, mortality experience definitely negatively impacted by COVID-19. But if it was significantly even worse than what our expectations would be, probably the management action that we would take is that we would have to reduce that remittance somewhat out of the U.S.-like companies in the first half of the year. We definitely want to protect the ratio, but given the sensitivity analysis and the and the scenarios that we run, we still feel comfortable that we'll be able to take out that 450 and still maintain the U.S.-RBC ratio at adequate level.

Thank you very much.

Our next question comes from Andrew Baker from Citi.

Hi, guys. Thanks for taking my question. Just one left from me.

Are you able to provide an update on your US mortality experience you've seen in the second half so far? And what are you currently assuming for your end? Thank you.

Beth? Thanks, Andrew. We do have July claims experience, and it looked to be actually lower than what we had seen in the first half of the year. We see actually a lower number of claims, and the average size of claims is actually reduced at this point in time. But we are definitely not out of the woods yet. I mean, COVID-19, if you look at the If you look at the deaths and the way that that is tracking, it's actually in the U.S. Death rates for COVID-19 direct causes have actually come down since April when they were peaking. But on the other side of the coin, we're getting infection rates back up. So it's very difficult to talk about what is the impact of additional mortality for the balance of the year. But, yeah, July was, I would say, a bit encouraging.

Thank you. Our next question comes from Benoit Petrarch from Kepler. Please go ahead.

Yes. Good morning, everybody. So two questions on my side. The first one is coming back on this priority of strengthening the balance sheet. Obviously, you started to implement more conservatism on the balance sheet with assumption changes. Are you down there or do we need to expect still big assumption change in the second part of the year? I was trying to figure out if the leverage ratio of 28.4% is a kind of clean starting point for us to calculate the kind of required deleveraging going forward. And then the second one is on the Dutch Solvency 2 ratio and coming back on this issue of volatility.

I mean, how do you see the ratio today?

What is kind of the true level? And how do you want to address this volatility?

Will you consider the cash injection in the Netherlands? You know, just trying to figure out what is the dividend also capacity of the Dutch business as we speak, and also trying to figure out if you are still comfortable with the risk in plan. Thank you.

Thank you, Benoit.

Matt, take a shot at this. With respect to the leverage ratio, you say it is the 28.2% where we currently are. Is that a clean starting point? I think I mentioned earlier that this is one that we really want to revisit together with other elements of our capital policy. We will come back to you at the investor day in December to talk about this. But again, the $500 million that we do today is indicating a direction of travel. There may be additional deleveraging that we want to do. We also have to address quality of capital, which we will do at the investor day. With respect to the Dutch Solvency II ratio, is that sort of a normal number? You basically look at the I.O. for VA and you say whether that's normal or not. So at the end of the first half of the year, it was standing at 19 basis points. If that comes down, then we're really going to erode it. What's the average of the VA over time? Probably 13, 14 basis points, something in that space. So maybe relative to a long-run average, whatever that is, we're a little bit high. But as Laura mentioned, the issue in the Dutch business is really the volatility of the capital. So it's not going to result in us injecting – we're not going to inject cash into the U.S. business to solve fundamentally a volatility problem, not a level problem. We have a volatility problem first and foremost. So, you know, part of the IOPA review for 2020 is in part addressing the issue that we have with basis risk for the IOPA VA relative to our portfolio. We are continuing to engage with our own regulator, the Dutch Central Bank.

We are engaging with IOPA to see if that can be fixed. That would be the primary mechanism. or do it, that we could manage that volatility. But again, we are working with the Dutch side. Central Bank is a mechanical problem. that is part of Solvency II, not an economic problem. We want to solve it in that manner. It will not result in an injection of cash into the metal. So, as I'm just saying, the issue, and that's Business for you, it's just a VA issue. There's no other kind of assumption issues underlying.

It's just a VA problem.

The V has been creating a lot of volatility, but we have seen also many other reasons for the ratio to move up and down over the past three, four years.

I would look – I just tell you, primarily it is the disconnect between the IOBA and the – let's say the credit risk that's sitting in the portfolio.

Weird. you know, the mortgage, you know, you have mortgage valuation versus, you know, a basket of securities. that's basically corporate credit and government bonds in an IOPA reference portfolio. And our portfolio looks nothing like that. That is by far the biggest driver of the volatility in the ratio. Great. Thanks. And our final question today comes from Stephen Haywood of HSBC. Go ahead. Thank you very much. You've talked a lot. a lot about obviously deleveraging and review of your businesses and obviously there'll be cash coming out with these at deleveraging but if you What about any acquisitions going forward in the markets that you consider strategic? I assume that... increasing diversification will help lower the volatility of Solvency II ratios. ...businesses, whether they're anything thoughts about M&A in the future. That's all. And then secondly, just a quick question on your dividend. Are you still going to assume a broadly 50-50 split between the interim and the final? Thank you. Yes, Stephen. Good morning. I'll take two questions. I guess your point about diversification, but, you know, let's say acquisitions are... point on a priority problem. Secondly, the point about the dividend. Yeah, so we The interim dividend is $0.06, as you know. Usually, your final year dividend for 2020, you take it. decision on that when the year is over and when the year is behind you. We're in the half of the year, so I think it's a bit early to... to talk about. But if you look at our past behavior, or historic patterns, Usually, the interim dividend represents 50% of the full-year dividend over any year. That is something that for 2020 can be seen as a guidance for that. Thank you very much. I will take the decisions, obviously, when the year is over. With that, yes? That concludes today's conference call. Thank you for your time and interest in making reports. Thank you very much, everybody, for being on the call and for all your questions.