Good day, and welcome to the Aegon 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 Aegon'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, Lard Friese, for his first results conference call at Aegon. Also with me is our CFO, Matt Rider, 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 back to Lard.

Yes. Thanks, Jan Willem, and good morning, everyone. Thank you for joining us on 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 3 months in the job as Aegon'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 Aegon and its customers and what our response has been. So let's move to Slide 2. As you can see on Slide 2, underlying earnings for the group were down by 31% to €700 million. Higher mortality rates, in part due to COVID-19, and lower interest rates 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 life 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 nonmedical underwriting limits in the U.S. Life business due to difficulties for paramedical examinations that 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…

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 6. 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 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 nonessential 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 Aegon International increased, driven by fewer health insurance claims in Spain and Portugal, because of the pandemic-related lockdowns.…

Thank you, Matt. Let's move to Slide #14. Let me round up by underscoring once more, that it is my ambition and that of my management team, to transform Aegon 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. We are focusing on 4 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 2 questions, so that everybody gets a chance to speak. So operator, please open the Q&A session.

[Operator Instructions] And we'll now take our first question from Farooq Hanif of Crédit Suisse.

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 an obvious question is the structure of the group with a U.S. focused business with a totally different capital regime, maybe a bigger impact from IFRS. Is it on the table that you look at the actual -- a breakup of the group? That's question one. Question two on deleveraging. I mean you've talked about the €500 million of senior notes. What kind of metrics are you looking at? Where do you want to get to ultimately on leverage?

Yes. So Farooq, I suggest that I'd take the first one, and then maybe you can take the second one, Matt. So the first one. What I've said today is that if I look at the total composition of the group, we are present in 20 countries. And 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 at the Capital Markets Day, we're still working through our thinking there, the Capital Markets Day will give you a framework on how 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 U.K. 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 Aegon has a great opportunity to create a lot of value. Just like, 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, how do you create more strategic focus to the group to ensure that you can create longer-term the -- create more value for stockholders over time.

Farooq, with respect to the leverage ratio, I think the analysis behind that is really still taking place. When we have guided you today to the fact that we are going to take out USD 500 million of debt in December, we're indicating really a direction of travel here. We definitely want to reduce the risk profile of Aegon, 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 Markets Day 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 a 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 on the Capital Markets Day.

Our next question comes from Cor Kluis from ABN AMRO Bank.

Cor Kluis, ABN AMRO. I 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. And it's good that you aligned some of these assumptions well. Question is more about Europe and Asia, also an assumption review there going in the second half of the year. Could you comment a little bit on that and might be expect at Q4 results? Or might it also be happen at the -- happening at the Capital Markets Day? And what are the items you're really looking at? So that's on that side. And secondly, on the U.S., maybe a question for Lard. Question is, 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 year. But could you give your comments and views what you've learned and especially on items like Long-Term Care and Variable Annuity business? What's your view on that part of the U.S. business as well? That were my questions.

Thank you very much, Cor. On the assumption updates, Matt, maybe and then shall I start first with the impressions for the U.S. Yes. So indeed, I've started in the middle of the pandemic. So I was supposed to be in the U.S. for quite a long time, actually, and only was physically there for a week, after which I had to return back because of the travel restrictions that were imposed at that time. But I have been able to conduct 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 to -- we wanted 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, that is retirement business, retirement plans and employee benefits and the like and voluntary benefits. And then we have another division setup, which we call Individual Solutions. And that's the business that basically sells the annuity business, but also final expense, term life, whole life, universal life products. We have also decided to appoint 2 new CEOs in those 2 business lines. So the 2 business lines there now have new CEOs, very talented leaders that have been appointed there to ensure that we drive the performance and the commercial momentum of the company. If I look at the product portfolio, of course, with these low rates, we need to be realistic that the living benefit in the Variable Annuity book is, obviously, something which quite -- is quite under pressure in terms of profitability, while still maintaining a good consumer outcomes. And as a result, we have adapted the product range in May, and we are going to continue to navigate…

Thanks, Cor. With respect to the assumption review, the first half assumption review, as we've said, is taking care of the U.S., also Transamerica Life 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 would 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.

Our next question comes from Michael Huttner from Berenberg.

I just wanted to -- on the cash at year-end, whether you could talk me through the moving half. I heard the figures, but really I was typing at the same time, not focusing, minus €550 million, which is the dividend and holding costs, minus €141 million for Santander, and I guess, minus €455 million for the debt repayment. So trying to deduct that from the €1.7 billion, I get to a €0.6 billion, and you said you'd be at the bottom end of the range, €1 billion. So if you could help me on that will be lovely. And then second, the -- your new colleague, is a fantastic guy. What I remember most of him is his key question is always what is the number of shares. In other words, the potential dilution to come from capital increase. And I just wondered if you can explain a little bit your thinking on that. And here, I alluded to the fact that you did have a registration statement. I was sure that's kind of normal events in July. But that registration statement does have the possibility of issuing shares and when can that be?

Yes. I mean, Matt, if you can take Michael through the numbers on the cash and the holding. But before we do that, may we go 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 the...

Yes, yes. No, no, that was Duncan. He is now in the group, right. And his key question is always, what is the right number of shares. Now you have a shelf registration to issue shares in Aegon NV. And I just wondered is there a risk or possibility that all these reviews will lead to a capital increase?

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 USD 925 million Q2 instrument under the 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 €500 million of debt. I mean that to me is a clear answer to, do you have any plans at this point for this? The answer is no. I mean, 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 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 in the -- throughout the -- 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 should get the proceeds from the divestment of our Japan business. So that's about €150 million. We also expect about €250 million 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 €0.06 per share that we've announced today. And then the change in the financial leverage is that USD 500 million senior, and that gets you to something over €1 billion in the holding excess cash at the end of the year.

Our next question comes from Farquhar Murray.

Just two questions, if I may. Firstly, on the dividend rebase, you seem to have rebased to a level that you can sustain against closable stress outcomes. But could you just outline what needs to happen for Aegon 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 U.S. remittances, might actually take for 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 can you just update us on where you stand on those currently?

Thank you, Farquhar. I will take the first question and Matt, you are taking 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, over 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 through 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 now provided we're successful in executing those plans in the coming years, that will put the entire business into 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 -- it's an annual test that we run at the end of the year. We have done a number of legal entity restructurings 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 TLIC and TPLIC that is scheduled to happen on October 1st of this year. We are also coapting 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 have eroded 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 completed by the end of the year. With respect to the premium deficiency reserve testing, again, this is an annual test and that's when where we're going to be close. Do you need to -- so the -- again, the change that we have made to the morbidity improvement assumption has eroded part of that headroom and we -- 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 as a followup, do you have any sense of the magnitudes of erosion you're talking about there?

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

Our next question comes from Ashik Musaddi from JP Morgan.

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 IFRS, but in terms of stat accounts, do you think that if interest rates remain here for 5 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 had. Second question. You keep on mentioning that you want to reduce the risk profile of the company. 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 flows -- cash, say, capital generation at the moment in light of new interest rate environment in U.S. and in Dutch businesses? I mean, in past, I think U.S. capital generation was about $900 million and Dutch capital generation was about $300 million, $350 million. But because of falling interest rates, because of your reduction in this 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?

Yes. Thank you very much, Ashik, for your questions. I'll take the question that you directed me about the risk profile of the company. And Matt, I'll look for the other questions to you if you don't mind. So on that. Yes, the way -- 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, and 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 we are creating -- where 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. Number two, I also see a lot of volatility. You see volatility in capital ratios, but it 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, yes, 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, if you will, the strategic focus, ensuring 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 back 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 pretax earnings, capital generation, all sort of the same thing. But then if the next year, that level of interest rates persist, then it compounds because you've got another €5 billion that you have to reinvest. So €50 million goes to €100 million, goes to €150 million 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 1 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 a quite a significant UFR drag that's going on in the Netherlands, it stands at about €275 million annualized today. But that's just a reflection of where interest rates have come. But 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. Okay, I forgot.

Yes, on the capital generation. 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 experience. But also, we are going to be taking real impairment losses, real defaults on bonds through the statutory accounts. And that is -- 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 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 for the U.S.

Our next question comes from William Hawkins of KBW.

Matt, what you were just saying to Ashik is partly answered. 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. Your €4.1 billion 3-year target, I mean that was an anchor point for Aegon. And I can see why you've to adjust your cash and leverage use, but to me it's a little bit more fundamental that you seem to massively have eroded back from that number. So just to be clear, we seem to be annualizing now at below €1 billion 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. So I suppose if I'm right about the question I wanted to ask. You made a couple of references. I think Lard 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's actions also been boosting your historical normalized capital generation figures in a way we haven't seen? And if so, by how much, or is that comment about management's actions more just referring to the dividend upstreams and the rest of it? And then secondly, Lard, I'm sorry to come back to this point about rationalizing 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 3 big regions, which you seem pretty committed to even before we get on to asset management, they're generating more than 95% of your operating earnings and capital generation. So it would seem to me that anything that you do in the other 15 to 17 regions is really going to be marginal to Aegon'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 Aegon? Or is this more just about maybe quite reasonably, just wanting to reduce your distractions? You've got 3 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?

Yes, Will. Let take that first, Matt, and then the last piece first. I understand your questioning. Yes, 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 just that we're trying to get across today. On what strategic focus, I mean, do not be distracted and focus on things that move the needle and really and surely to 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 more focus also on markets, management time, attention, et cetera, makes your company with a hop in your step, and that's what we need to come. 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 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 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, I guess, just one core question, have the historical figures been flat...

Yes. The short answer is no. Yes, the short answer is no. Management actions typically are things that would either improve a Solvency ratio or improve the headroom, something in that space, but it usually is more negative on normalized capital generation. 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 I would say, we've done this in the U.S. business, it has allowed us to pay more dividends than what's, let's say, the normal earnings of the business would be able to afford. Good example of that, you may remember, 2017 when we sold the COLI/BOLI business in the U.S., it ended up generating about $700 million of additional capital, which they were -- 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 in-force 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.

Our next question comes from David Motemaden from Evercore.

Just a quick question for Lard, just on strategy and specifically on the U.K. and just how you think this business fits into the group. It does sound like this is strategically important. But I guess just sort of how you think Aegon is positioned in the market there, and I guess, why you wouldn't consider doing something more drastic there in terms of freeing up capital? Second question, just for Matt, I guess, sort of a 2-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?

Well, can I get first -- Shall I first on the U.K.? Okay. On the U.K. business -- David, good day to you. On the U.K. business, yes, I think we're -- 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 Scottish 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. And we're -- the company is doing well, with the movement from, let's say, the in force book, which over time is maturing and at the same time, 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 yes, 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 5 years. I would seriously doubt whether this thing is going to be done by the end of the year, but there's no -- there's really no update on this one. Yes, 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 grade-in 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 grade in. 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. And if I could just sneak one more in, just on local capital levels across the group. Lard, do you think that those need to be increased from the current ranges or maybe the ranges tightened up at the top end, sort of, in the vein of trying to improve the financial strength of Aegon?

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, right? 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 need -- we know it's a mechanical thing partly, but we need to address that and make sure that becomes more stable. So rather than the levels of capital themselves, as I said in my opening statement, the regulatory capital levels are satisfactory, that's not the point. It's more the volatility around it that, I believe, needs to immediately addressed.

Our next question comes from Albert Ploegh from ING.

Albert Ploegh from ING. Yes, a few questions from my end. The first one on the deleveraging. If we take one step back, so basically pre-COVID's mark, which you've taken the same kind of conclusion that leverage has been actually too high and because I like to understand what is structural there in terms of deleveraing need and what is it to like, yes, the new world now given COVID, so to understand to get that? And then just one on the interest as well, on IFRS 9 and 17, has it played a role or a factor in the decision also with [indiscernible] for the time being? Is there also an element there? And then one question also in light of the rebasing of the dividend. Can you confirm whether the Aegon 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 clearly be -- still feel comfortable with the range, but should we also, given the COVID situation and in the [indiscernible] you rather like to move to the higher end in, let's say, 2021, '22? Or [indiscernible] the €1 billion? Is this just fine level for you?

Yes. So I'll take the first one and Matt, if you take the other points. Yes, Albert, on the -- well, don't get that -- let me first say, U.S. rates, for instance, are now more than 200 basis points lower than they were a while back, for instance, in the second half of 2018. So rates have come down. So this thing -- rates have come down, and that changes the outlook on capital generation, and therefore, the views on leverage. And -- because rates down puts pressure on the coverage of fixed charges of the financial leverage by the fix -- by the remittance from the subs, which is not where we want it to be. And especially in light of the volatility of the recurring remittances, which I just highlighted from the units that we have seen in some years -- in recent years, now we believe that this volatility is exacerbated by the current environment and as a result, which is prioritizing to delever the company, strengthen the balance sheet. And secondly, focusing on performance improvement, efficiency improvements. And as a result, getting the free cash flow generation of the business is 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 9, 17 factor. I would say IFRS 9, 17 is not a direct driver of a move to delever. 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 Aegon Association, yes, there's no bank debt remaining on that one. So they've done a good job taking [indiscernible] of the company over time, using the dividends that we've been paying them to do so. But 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 €1 billion? No. We would rather have it up more towards the end of -- up towards the top of the target range. And we are going to try to work that up. So when Lard talks about decreasing the risk profile of the company, it also means establishing a bit more cash [indiscernible]. 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.

Our next question comes from Jason Kalamboussis from KBC Securities.

Nice to see you both, Lard 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. if you see -- I mean, we mentioned before the BOLI/COLI, 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 a bit within this question, how do you see the balance of the U.S. business versus the rest of the group? I mean, you are predominantly a U.S. business. We already discussed about speaking a group or other things with the previous questions. But just I would like to know, as you are 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 have discussed it back in May. You had the new product launch with ECS. Maybe, you mentioned an uptick, but I didn't hear it very well. How is this going on? Have you launched new products? And also there, you spoke about new investments. I just would like to stand 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 U.K. Solvency II at 154%. I know your lower end of the range, 145%. But are you happy with it?

Yes, Jason, and I'll start with the first question you answered. Then, Matt, can you take the others? So let's start with your point about strategic focus. 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 selling a right product, being efficient and strong management activity. That's what I aim to achieve over time. But that's not where we are today. We revised that and 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, like 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 you're -- your chosen markets and where you're looking into. And 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 us. So Matt, could you take some of the other questions, please?

Yes. 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, as 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 RILA's in the second half of this year. Next year, we will introduce our own RILA, again, in the -- 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, 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 launch. So your last one was new investments in retirement plans. Yes, we are making technology investments basically to improve customer and adviser experience, and those were things that were slated. As we came into the year, we're expecting to invest quite a bit in the U.S. business, which we have done on the technology side. But given the COVID-19 environment, I think Lard 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.

Only the point on the U.K., I think.

Am I happy -- I'm sorry, the U.K., there was 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, but actually did pay it, by the way, the -- in the beginning of July. About 154% is down there, 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 the 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 on the U.K.

Our next question comes from Fulin Liang from Morgan Stanley.

I've got two questions. The first one is just wonder how are you going to protects 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 of €350 million. But if -- when I look at the credit migration and defaults, you implied it not picked yet and also your portfolio is not completely new to equity market movement. So €386 million versus €350 million, it doesn't sound a bit of a much margin to me. So I just wanted to see if the market actually deteriorates from here, what would -- could be the management actions to protect your U.S. RBC ratio? So that's the first one. Second one, I think the question being kind of asked before, just want to follow up. On the point of improving the company's risk profile, could you add some color, 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 more fraud risk? Do you like the [indiscernible].

Thank you for your questions. Let me take the last question, and then I'm asking Matt to take the first one on the RBC 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 aim to do is create a situation where the company comes -- volatility is 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 by the end of the year. So Matt, the RBC?

With respect to protecting the U.S. RBC ratio. So to be clear, even -- 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 even under a reasonable set of adverse scenarios, we still think that it will be possible to take out that $450 million. So -- but let's say -- and again, that's just assuming 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. Life companies in the first half of the year. We do want to -- we definitely want to protect the ratio. But given the sensitivity analysis and the scenarios that we run, we still feel comfortable that we'll be able to take out that $450 million and still maintain the U.S. RBC ratio at an adequate level.

Our next question comes from Andrew Baker from Citi.

Just one from me. Are you able to provide an update on the -- on your U.S. mortality experience you've seen in the second half so far? And what are you kind of assuming for year-end?

Matt? Thanks, Andrew. Matt?

We do have July 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 -- but 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 -- and if you look at the deaths and the way that, that is tracking, so actually in the U.S., death rates are -- 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 yes, July was, I would say, a bit encouraging.

Our next question comes from Benoit Petrarque from Kepler.

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 done 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 II ratio and coming back on this issue of volatility. I mean, how do you see the ratio today? What is the kind of the true level? And how do you want to address this volatility? Will you consider the cash injection in the Netherlands? Or 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 re-risking plan there?

Thank you, Benoit. Matt, take a shot of this.

With respect to the leverage ratio, yes, you say 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 a sort of a normal number? You basically look at the EIOPA 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 Lard mentioned, the issue in the Dutch business is really -- it's 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 part of the EIOPA review for 2020 is in part addressing the issue that we have with basis risk for the EIOPA VA relative to our portfolio, we are continuing to engage with our own regulator, the Dutch Central Bank. We are engaging with EIOPA to see if that can be fixed. That would be the primary mechanism we are doing, that we could manage that volatility. But again, we are working with the Dutch Central bank. It is a mechanical problem that is part of Solvency II, not an economic problem, and we want to solve it in that manner. It will not result in an injection of cash in the Netherlands.

So as I understand, the issue in the Dutch business for you, it's just a VA issue. There's no, kind of, assumption issues underlying? Just a VA problem. That was, I think, creating volatility. The VA 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, say, 3, 4 years.

Primarily, I think -- I would look -- I'd just tell you, primarily, it is the disconnect between the EIOPA VA and the, let's say, the credit risk that's sitting in the portfolio. We're the mortgage -- you have mortgage valuation versus a basket of securities that's basically corporate credit and government bonds in an EIOPA reference portfolio, and our portfolio looks nothing like that. And that is the, by far, the biggest driver of the volatility in the ratio.

And our final question today comes from Steven Haywood of HSBC.

You've talked a lot about, obviously, deleveraging and review of your businesses. And obviously, there'll be cash coming up with the deleveraging. But have you thought 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 that is there for businesses. Whether are there any thoughts about M&A in the future at 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?

Yes, Steven, I'll take your question. Yes, I get your point about diversification. But let's say, acquisitions are at this point, not a primary view for us. Secondly, the point about the dividend. Yes, so the interim dividend is €0.06, as you know. Usually, a final year dividend for 2020, you take a decision on that when the year is over and when the year is behind June. We're now half in the year. So I think it's a bit early to talk about decisions there. But if you look at our past behavior, our historic pattern of this, usually, the interim dividend represents 50% of the full year dividend over the end of the year. And that is something for 2020 can be seen as a guidance for that. But we'll take the decisions, obviously, when the year is over.

That concludes today's conference call. Thank you for your time and interest in Aegon. Look forward to engaging with you in the future.

Yes. Thank you very much, everybody, for being on the call and for all your questions. Have a good day.

This concludes today's call. Thank you for your participation. You may now disconnect.