Aegon N.V. (AEG) Q3 2022 Earnings Call Transcript

Aegon N.V. (AEG)

Q3 2022 Earnings Conference Call

November 10, 2022 03:00 AM ET

Company Participants

Jan Willem Weidema - Head, Investor Relations

Lard Friese - Chief Executive Officer

Duncan Russell - Chief Transformation Officer

Matt Rider - Chief Financial Officer

Conference Call Participants

Andrew Baker - Citi

Robin van den Broek - Mediobanca

Cor Kluis - AAOB

David Barma - Exane

Michael Huttner - Berenberg

Ashik Musaddi - Morgan Stanley

Michele Ballatore - KBW

Steven Haywood - HSBCIB

Nasib Ahmed - UBS

Presentation

Jan Willem Weidema

Thank you for joining this conference call on Aegon's Third Quarter 2022 Results. Before we start we would like to ask you to review our disclaimer on forward-looking statements which you can find at the back of the presentation.

With me today are Aegon's CEO, Lard Friese; CFO, Matt Rider; and Chief Transformation Officer, Duncan Russell who will take you through our 3Q results and the progress we are making in the transformation of Aegon. After that we will continue with our Q&A session.

And on that note, I would like to give the floor to Lard Friese.

Lard Friese

Yes. Thanks Jan Willem and good morning everyone. We appreciate that you're joining us on today's call. It's been a busy few months for us here at Aegon and I want to start by running you through our achievements on slide number two.

In the past few months we have taken a number of important steps in the transformation of Aegon. We have made substantial progress on our operational improvement plan and taken additional actions to maximize the value of both our US variable annuity book and TLB, our high net worth insurance business. And of course, we recently announced the combination of Aegon the Netherlands with ASR.

We also made solid progress on our ambition to grow our strategic assets, especially in our life and retirement businesses despite continued financial market volatility and political unrest.

Our operating results in the third quarter declined by 11% on a constant currency basis, reflecting adverse market conditions that more than offset an improvement in claims experience in the United States expense savings and the benefit from growth initiatives.

Based on extensive analyses and the learnings from engagements with third-parties, we have concluded that the best option with respect to our US variable annuity portfolio is to continue to own and actively manage it at least in the near-term.

Furthermore, we recently completed an internal reinsurance transaction between TLB and Transamerica that freed up $600 million of excess capital. This will in part be used to create a buffer to mitigate the impact of adverse equity markets which materially reduces the capital sensitivity of our US variable annuity book. But we're not done yet. We continue to see opportunities for growth and greater efficiency and we will remain focused on the execution of our strategic agenda.

So, let's turn to slide three. In October, we took a pivotal step in our transformation with the agreement to combine our Dutch activities with those of ASR to create a leading insurance company in The Netherlands.

The transaction enables us to accelerate the return of capital to stockholders. It also propels our strategy of releasing capital from mature businesses and building advantaged businesses in our chosen markets where Aegon is well-positioned for growth.

Additionally, the long-term asset management agreement that we have entered into with ASR strengthens our position as a provider of fiduciary services, retirement multi-asset solutions, fixed income, and responsible investing. We are excited about the transaction and the opportunities it brings.

After the closing, we will hold a strategic stake of almost 30% in ASR. And through this stake, we will benefit from the synergies that this in-market consolidation brings. The majority of the cash proceeds from the transaction will be used to return capital to shareholders. We expect the transaction, the synergies, and the capital deployment to result in accretion of the free cash flow per share over time.

We have started the preparations to get approvals from the relevant stakeholders and we initiated a program to disentangle the Dutch business from the group to ensure a smooth transition to ASR.

Slide number 4 highlights the good progress we continue to make with the execution of our operational improvement plan. We have now implemented most of the more than 1,200 initiatives that are part of this plan. Just in the last three months, we completed another 100 initiatives and our efforts are bearing fruit.

Expense initiatives resulted in a reduction of annual addressable expenses of €300 million in the trailing four quarters compared with the base year 2019. This is an increase of €50 million compared with last quarter. We have been able to absorb inflationary headwinds and further reduce our expense base towards the goal of €400 million expense savings by 2023.

We are also increasingly seeing the benefits from our 260 growth initiatives that we have executed so far. Over the trailing four quarters, growth initiatives contributed €264 million to our operating results.

In light of the announced transaction with ASR, we will update our expense savings target and other targets in due course. And in the meantime, we will remain disciplined and focused on improving the operational performance across all our businesses.

Slide number 5 zooms in on the progress of our US strategic assets. In individual solutions, we have the ambition to regain a top five position in selected life products over the coming years. And as you can see, commercial momentum remains strong in this segment.

New life sales increased by 24% compared with the third quarter of last year. This was supported by the World Financial Group distribution channel where the number of licensed life agents grew another 10% compared with last year and now stands at nearly 60,000 agents.

In the retirement business, Transamerica aims to compete as a top five player in new middle market sales. Written sales were US$805 million this quarter, which is lower than the same period last year. Nevertheless, I'm satisfied with the results, considering the difficult circumstances with planned sponsors being hesitant to move retirement plans given the current volatile markets.

Strong written sales in prior periods supported an increase in net deposits for the middle market to US$532 million. We will build upon Transamerica's emerging commercial momentum and intend to invest capital to profitably grow our market share in selected product lines.

We will share more details on our plans to profitably grow Transamerica as well as the UK our growth markets and our global asset manager at a Capital Markets Day in the second quarter of 2023.

Turning to slide 6, where we highlight the performance of our Dutch and UK strategic assets. I will start with the Netherlands, where we are a leading player in both mortgage origination and defined contribution pensions and continue to attract new customers.

Mortgage sales decreased to €2 billion as the Dutch housing market is cooling down. Nevertheless, mortgages under administration continue to grow, partially due to lower client repayment activity that now amount to more than €62 billion. We also continue to consistently grow our workplace business, mainly driven by sustained strong demand for PPIs. Net deposits for defined contribution pension products increased by 35% to €245 million in the third quarter of 2022.

Moving on to United Kingdom. In the third quarter of 2022, the platform business across the retail and workplace channels generated net deposits of £83 million. Our workplace business delivered another quarter of positive net deposits. Outflows in retail reflects the impact of market volatility on customer confidence and their propensity to invest in line with what we have seen across our industry.

Revenues for the overall UK business declined, as a result of the anticipated granular runoff of the traditional product portfolio. Despite the unfavorable impact of adverse markets under assets under administration, the efficiency of the platform deteriorated only slightly as a result of the steps we made to reduce expenses.

Slide number 7 shows that our Asset Management business saw third-party net outflows in the global platforms, which reflect the challenging market conditions and the fact that customers freed up liquidity in a rising interest rate environment. Third-party net deposits and strategic partnerships of €1.5 billion more than offset the €1 billion outflows in global platforms, leading in fact to positive net deposits for Asset Management overall.

The operating margin of global platforms improved by around two percentage points to approximately 15% driven by lower expenses. This includes a reduction in accruals for variable compensation. The operating result from strategic partnerships decreased by 38%, as performance fees for our Chinese Asset Management joint venture reduced from last year's elevated level due to adverse market conditions.

In our growth markets, Aegon is investing in profitable growth. New life sales from these markets increased by 16% to €54 million and non-life sales grew by 17% to €25 million. In summary, we remain focused on executing our strategic agenda and continue to maintain a high pace in transforming Aegon despite the challenging backdrop.

Duncan will now provide you with more detailed information on the actions we have taken regarding TLB and the US variable annuities book. Duncan, over to you.

Duncan Russell

Thank you, Lard. Let's move to slide 9. At our Capital Markets Day, we laid out our strategy to focus on three core markets, three growth markets, and one global asset manager. We made clear that businesses outside the corporate amidst they will be managed with tight capital and a bias to exit. We made good progress on our portfolio rationalization, whether it's through the divestment of Central and Eastern Europe, or our various actions to release capital by winding down or selling subscale ventures and businesses.

TLB our high net worth business was the largest remaining operation outside the core perimeter. In the past two years, it has been managed with a focus on strict cost control and capital efficiency to increase its capital generation.

Over the past years, we have considered different strategic options for TLB, including a divestment. Following this review, we have decided to extend our internal reinsurance of TLB's closed block to Transamerica. As of the fourth quarter of 2022, Transamerica will also reinsure the remaining 75% of TLB's close block of universal life policies that have previously not been reinsured meaning that 100% will now be internally reinsured.

Transamerica will hold additional reserves to cover the underlying risks, but it will also be allowed to recognize excess capital of TLB in its capital position. This frees up around $600 million of excess capital on a US level, which will increase Transamerica's RBC ratio by approximately 30 percentage in the fourth quarter of 2022. As a consequence, we feel that we have landed on the optimal solution for TLB compared to the alternatives and therefore, we'll classify the business going forward as a financial asset with a continued focus on improving cash flows and disciplined capital management.

Next on Slide 10, let me update you on our variable annuity business. In recent months, we have engaged with third parties to explore the possibility for a reinsurance deal. These interactions gave us confidence in our actuarial assumption set for variable annuities. And we saw that these third parties aim to manage the liabilities economically just as we do. Put simply, we witnessed a management approach and philosophy around VA that was consistent with where we have taken the block in recent years.

Following these interactions, we have decided not to engage further on a variable annuity transaction at this point in time. There are three main reasons for this. First, a transaction will lead to significant counterparty exposure given the size of the variable annuity business we have. And we have concluded that doing a smaller deal and thus reducing potential counterparty exposure wouldn't represent a good use of time and effort given the intensity of these processes.

Second, we would need to deal with stranded costs as the variable annuity block supports a substantial amount of overhead expense. These costs will need to be addressed as a block shrink naturally over time in an orderly manner. Over time, as the variable annuity block runs off and we successfully grow our strategic assets, stranded costs and counterparty risk will become less of a consideration for us....

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