Good day, and welcome to the Aegon Second Quarter 2021 Results Conference Call for Analysts and Investors. Today's conference is being recorded. At this time, I would like to turn the conference over to Jan Weidema, Head of Investor Relations. Please go ahead, sir.

Thank you, Stewart. Good morning, everyone, and thank you for joining this conference call on Aegon's second quarter 2021 results. You 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. With me today are Aegon CEO, Lard Friese; Chief Transformation Officer, Duncan Russell; and CFO, Matt Rider. Let me now hand over to Lard.

Thanks, Jan Willem, and good morning, everyone. We appreciate that you are joining us on today's call and look forward to updating you on our second quarter results. In my part of the presentation, I will take you through the strategic highlights and through the progress we have made on our strategic assets. Our Chief Transformation Officer, Duncan Russell, will take you through the actions we are taking on our U.S. variable annuity business, and Matt Rider will then go through the details of the results and our capital position. Finally, I will conclude the presentation with a wrap-up, after which we will open the call for a Q&A session. So let's move to Slide 2. We have made steady progress on our strategic priorities and financial targets, and I'm encouraged to see this reflected in our second quarter results. Economic recovery aided by increased vaccination rates supported our results. The second quarter of 2021 saw an increase in the operating result across all segments driven by expense savings, increased fees due to higher equity markets and normalization of claim experience in the United States. We have made good progress on the implementation of our expense savings program and have seen a €220 million reduction in annual addressable expenses through the second quarter. This strengthens our confidence in our ability to deliver on the 3-year target of €400 million expense savings. Our balance sheet remains strong, with the capital ratios of all 3 main units currently above their respective operating levels. We have made steady progress in managing our financial assets during the second quarter. We launched a program that offers certain variable annuity customers a lump sum payment in return for surrendering their policies. Furthermore, we plan to dynamically hedge the remaining legacy variable annuity portfolio for equity and…

Thank you, Lard. At our Capital Markets Day, we laid out our intention to maximize the value from our financial assets by accelerating, increasing or derisking the cash flow of these blocks of businesses. To date, we have focused our resources on identifying and implementing unilateral actions, steps we can take ourselves and bilateral actions, steps that we can take in conjunction with other stakeholders. I would now like to highlight 2 recent actions that we have taken on the Variable Annuity business, which in total had USD 85 billion of account value. These actions demonstrate our approach to managing our financial assets. The two actions we are announcing today are aimed at reducing our risk exposure to the legacy block of business with income and debt benefit riders. The first action is targeted at the GMIB block of business. This is a mature block of business with an account value of USD 6.5 billion and mainly consists of policies sold by Transamerica from the 90s until 2003. The associated guarantees were not originally priced, nor subsequently managed on a risk-neutral basis. And therefore, despite being less than 10% of our variable annuity assets, the GMIB riders alone consume about 40% of the required capital of the variable annuity book. In mid-July, we launched a buyout program for the GMIB customer base, whereby we offer customers a lump sum payment in receipt of surrendering their policies. This may be an attractive choice to some customers given that their needs may have changed since they originally purchased their policies about 20 years ago. On our side, we compare the cost and benefits of this program with our alternatives, including running the block off over time or transacting with a third party, and we see the buyout program as an attractive way…

Thanks, Duncan, and good morning, everyone. On the next several pages, I will take you through the highlights of our second quarter 2021 results and on our capital position. Let me start with the financials on Slide 13. Expense savings, increased fees from higher equity markets and a normalization of claims experience in the U.S. drove the increase of our operating result by 62% from the year ago quarter to €562 million. Our balance sheet remains strong, with the capital positions of all our 3 main units firmly above their respective operating levels and the group Solvency II ratio at 208%. Cash capital at the holding is in the upper half of the operating range at €1.4 billion. This allows us the flexibility to continue to execute on our transformation as well as to further reduce our gross financial leverage, which stood at €6.1 billion at the end of the second quarter. One of our priorities is the reduction of economic interest rate exposure in our U.S. business. As to the actions discussed by Duncan, we have executed on about 2/3 of our interest rate reduction plan. This primarily involved lengthening the duration of our asset portfolio and extending our forward starting swap program. Another priority is proactively managing our long-term share portfolio. In the second quarter, we obtained approval for additional rate increases worth USD 64 million. This brings the total to USD 176 million and means that we have already achieved over 50% of our $300 million target. Let me turn to Slide 14 to go into more detail on the expense savings. At our Capital Markets Day, we announced our plan to reduce addressable expenses by €400 million. In the last 4 quarters, we reduced addressable expenses by €245 million compared with 2019. €220 million of these…

Thanks, Matt. And thank you also, Duncan. I would like you all to take away from today's presentation that we are making steady progress on our strategic priorities and our financial targets. We have increased our operating results supported by all segments. We are implementing our operational improvement plan initiative by initiative and are maintaining an intense organizational rhythm. We have achieved more than half of our €400 million expense savings target for 2023. We are increasing the value of our variable annuities portfolio through a lump sum buyout program and by extending the dynamic hedging program. This also allows us to allocate internal resources to investigate our options around potential third-party solutions. And we are maintaining our commercial momentum in our strategic assets. Lastly, we continue to work together with the Vienna Insurance Group to close the divestment of our businesses in Central and Eastern Europe. VIG is in constructive talks with the Hungarian state and has indicated that they are confident that the matter will be resolved in the near term. In summary, I am pleased with the results we announced today and how we are progressing steadily on our strategic commitments and financial targets. I would now like to open the call for your questions. [Operator Instructions]. Operator, please open for the Q&A.

[Operator Instructions]. The first question comes from the line of Andrew Baker from Citi.

So the first on the U.S. risk management actions, wondering if you could give us a sense of the capital that you expect to be released from the expansion of the dynamic, the hedge and also the lump-sum buyout program. And then secondly on just your target. So obviously, it looks like you're on track to well exceed the guidance you had on OCG for both 2021 and potentially 2023 as well as maybe free cash flow. So I was just wondering if you could just give an update on what your expectations on those metrics are.

Thank you very much, Andrew, for your questions. The first one will be taken by Duncan and the second one by Matt. So on U.S. risk management actions, Duncan?

Thank you, Andrew. As indicated, we think the net impact of the 2 will be a -- no worse than a 5 percentage point hit to the RBC ratio. And within that, we'd expect a small positive from the buyout program and a small negative from the implementation of the dynamic hedge. The capital back in the VA block -- the statutory capital back in the VA block today has been around USD 2 billion. And once we implement the dynamic hedge, we think that will drop to around about $1.4 billion.

Okay. Matt, the...

Yes. On operating capital generation and, let's say, the remittance outlook. So just a reminder, at the Capital Markets day, we had guided for €1.1 billion operating cash gen from the business units. And in the first quarter call, I guided more to the €1.4 billion. Given the progress that we have made on the operational and previous plan and other tailwinds that we've foreseen through the second quarter, including the COVID mortality experience has been more benign, especially on the morbidity side, we're guiding now to something between €1.4 billion and €1.5 billion for operating capital generation. Now in terms of the remittance guidance, we had been guiding toward something like €1.4 billion to €1.6 billion cumulatively through 2023 at the Capital Markets Day. At this moment in time, we're not changing the guidance on remittances, but more saying that it looks like it's more -- is in the top end of that range more than the bottom and the middle slope. I think that's...

We will now move to our next question from David Barma from Paribas.

The first one is to come back on the measures on the VA block. So you -- I think the day 1 impacts are quite clear, but you also mentioned that the objective around the predictability of the business line. And obviously, it's quite difficult to look at the capital generation development of the variable annuity block. Can you talk a little bit about how we should think about the volatility of the metrics in that block post the actions that you've announced today? And then the second question is on the Dutch solvency ratio. Could you just help us break down the moving parts in the second quarter?

Thanks, David. So on the VA question, Duncan. And then the Dutch ratio, Matt. So, Duncan, please, over to you.

So you're right, David, that one of the drivers -- one of our philosophies has been to reduce the volatility around our capital base and capital generation. And for the financial assets, that's an important consideration. If you look at the variable annuity block of business post the implementation of the dynamic hedge, capital generation will be lower. We've guided for operating capital generation to be around USD 50 million lower and to be in the range of $250 million to $300 million going forward once that's implemented. That capital generation, there will be a higher quality because we will have immunized the risks around the guarantees in the block of business and we'll be left with volatility coming from the base contracts, which we think is more like an asset management type of fee income because that's the fee we earn on the underlying mutual funds. And then about half of the capital generation will be coming from that source, and the rest of the capital generation will be coming from the release of required capital spread earned on reserves, et cetera, which also we think is a higher quality source of capital generation. Hopefully, that answers your question.

So Matt, please?

Yes. For the Dutch solvency ratio, I think I agree with you pretty easily. So we started out the quarter at 149% solvency ratio. We had some operating capital generation there, so you kind of add 2% to that. And then we had some market variances mostly related to interest rate movements. So interest rates declined, but also the yield curve flattened. And then -- and real estate revaluations, which I think I mentioned in the opening, those added about 2 percentage points to the solvency ratio. So between those 2 things, markets added about 6 percentage points. And then there were some management actions that took place. You may recall from my opening remarks, we did settle a litigation basically that arose from a coinsurance contract in the Netherlands. That added 5 percentage points to the ratio. And there were some changes to the fixed income portfolio, which added 2 percentage points. Basically, it was a reduction of structured credit exposure. And then there were 10 percentage points worth of various model and assumption updates. I'm not going to get into the detail of that, but I think that should get you to around 172% that we ended the quarter at.

We'll now take our next question from Ashik Musaddi from JPMorgan.

Sorry, I was on mute. Sorry. Just a couple of questions I have is, how do we think -- I mean the two actions you are taking ultimately, it is negative for RBC ratio. It is negative for operating capital generation. It is negative for financial numbers, like IFRS numbers. So it's like negative from all those numbers perspective. I understand it reduces the risk, so that's a good thing. I mean, at least it will help your cost of equity. But does it help you to exit that business as well at some point, i.e., the moment you have like done all the hard work, heavy lifting of hedging, et cetera, then does it become very easy for you to exit that financial asset or it doesn't change anything from that perspective? So any thoughts on that would be very interesting. And would you be interested in exiting out once you have done all those heavy lifting? Or will you want, okay, I have done all this heavy lifting, why not sell it rather than just 1x for cash? So that's the first one. And second thing is to Matt, this thing about capital generation. You mentioned €1.4 billion to €1.5 billion is what you're thinking about at the moment. I mean, clearly, interest rates have dropped from when we discussed about €1.4 billion in first quarter. So clearly, if you're trying to still say that €1.4 billion has actually gone up, I'm a bit surprised. And it would be good to know what are the drivers of those jump given that interest rates have dropped in second quarter. So that would be very helpful. And like is it a good run rate going forward? Or is it just for including one-offs, et cetera?

Thanks, Ashik. So Duncan, on the VA, please, and then Matt will indeed take the capital generation question.

Ashik, I'll try and break down my answer to it. So firstly I think the 2 initiatives that we've announced today are meaningful and do create meaningful value for our shareholders. And part of the reason we're focused on them was because, in a relatively short period of time we've been able to identify ways to create value and also execute upon it. And that was part of the consideration of the focus at this point in time on bilateral and unilateral actions. As you point out, there's a small negative impact on the RBC, no more than 5 percentage points negative and a small reduction in operating capital generation going forward, as there's less capital to be released going forward. But they're outweighed in our view by the benefits to predictability certainty and just general risk management and also the fact that we've now aligned our statutory reserves and statutory capital to a risk-neutral economic view of the liabilities just makes our decision making going forward easier as our economic view is aligned with our capital view. I think you're right to say that the 2 actions are helpful, as we move now into exploring third-party transactions. As we've gotten now, as I said, the statutory capital base moves on to a more economic base, and we think third parties will look at it on that way also. And we are at the same time reducing the size of the GMIB block of business through the buy-out program and basically acquiring liabilities back below the economic value. So we are going to move into the phase now of exploring the implications of third-party possibilities to us, and we will be rational in our approach there as one of our themes indeed is to improve the predictability and quality of…

Yes. So I can pick up the operating capital generation. So yes, guiding toward €1.4 billion to €1.5 billion for the full year. One thing I would mention is that we have seen interest rates come down a little bit from the first quarter, so they were down about 30 basis points as of the second quarter and as of today maybe another 10 basis points. But just good to remind everybody that the -- we're not so sensitive to interest rate movements on the operating capital generation in the U.S., especially. Where we are sensitive is on equity markets, and those things have continued to perform strongly, and that is driving some of, let's say, the expected increase in the operating cap gen for the remainder of the year. Having said that, you asked like what's a decent run rate. So second quarter is a pretty good base from which to start. So just to kind of walk it forward, we had €376 million of operating cap gen after holding and funding expenses, sort of add that back, you'll get to €435 million, and then there were some positive one-offs. We had the combination of mortality and morbidity good guys in the U.S., and there were a couple of other tailwinds from other items within the -- within Europe. You come down to, like, let's say, a clean quarter would be about €380 million for the -- just for the same quarter operating cap gen within the business unit. The first half of the year, we did €723 million. Add 2x the €380 million and then you get to something in that €1.4 billion, something in that €1.4 billion to €1.5 billion space. Depending on what you think COVID is going to do in the last half of the year, we factored in the 50,000 U.S. population desk, called out a little less than half of, let's say, €20 million more or extra COVID claims. You could pencil your own number in there. We could be in the middle of a second wave. We didn't take anything into account for positive morbidity experience. So the €1.4 billion to €1.5 billion seems to be a safe number.

Fulin Liang from Morgan Stanley.

Very good set of results. I got 2 questions. So the first one, the VA, the kind of you're approaching your current existing customers to buy out the policies. I assume that has been -- you have gained regulatory approval. I'm just wondering how you -- and because as Duncan said, you actually buy out these policies under below the economic value of the policies. Well, have you -- how do you assess the kind of litigation risk in the future? That's the first one. And then secondly is you haven't mentioned about your plan on the fixed annuity book in the U.S. because that is also kind of your financial asset. Is -- you kind of -- is a fixed annuity solution will come together with variable annuity book solutions? Or is it a separate consideration?

Yes. Thanks, Fulin. So Duncan, over to you.

So key terms of the buyout program is we are offering our customers an opportunity to strengthen their policies in exchange of cash value. And as I pointed out, these products were sold a long time ago, in some cases, 20 years ago, and the circumstances of our customers could have changed over a period. So they have the ability to exchange or surrender that policy in exchange for cash payment, which is north of their account value and could be attractive to them. But it's obviously at their discretion and their choice, and they'll engage with their advisers on that. We did pre-engage with advisers before launching that program to get feedback, and we have had feedback, constructive feedback since its launch. But it's still very early, and we'll have to see how that progresses over the coming recent months. On our side, as you pointed out, the buyout offer is slightly lower than the economic value of the guarantees to us, and so we also think it is beneficial for our shareholders. The second question was on the fixed annuities, yes, and whether that will come together with VA. It could do. We'll -- as I said, we've just started exploring transaction considerations and considerations in general around third-party solutions for the variable annuity block. The fixed annuity block is also a financial asset. It could contribute to any liquidity considerations we may have around the variable annuity block, but that's something we'll take into account as we progress in the coming months and quarters.

We'll now move to our next question from Michael Huttner from Berenberg.

I have two questions, but I think, actually, can you say the various measures in the U.S. and the updated guidance on operating capital generation, what does it do to the U.S. cash remittance, which I think was $209 million in the first half? And at what stage when can we see a meaningful rise in this regard? What I'm trying to say is, could we see it already in the first half of '22 or the second half of '23? And the second question is on the buyout program. So the figures you've given are based on the 15% assumption. Can you give a little bit of a sensitivity around that figure, what if it goes to 20%, what would be the benefit? That's my two questions.

Thank you very much, Michael. Let's start with the U.S. cash remittance question, Matt Rider. And then followed by your question on the program by Duncan. So Matt, over to you.

Yes. What I can say there is that -- so just maybe the facts first. So in the second quarter, the U.S. did remit $209 million. That's their normal remittance. They did €18 million in the first quarter as well. We haven't changed our outlook for the remittances from the U.S., but I think it's important to reflect the fact that the -- we are increasing the dividend by €0.02 a share for a reason here. So we're not getting into the detail of remittance guidance within the U.S. But I think that the €0.02 a share increase is showing you something about that, and that is driven by operating capital generation that looks to be in that $900 million to $950 million range in the U.S.

Thank you. Duncan?

Yes. On the second question, Michael, the dynamic here is that we will be paying out cash if and when the policyholder opts out of that option and releasing associated guaranteed reserves and required capital. And we think that, that dynamic is a slight positive for the RBC ratio as indicated. We're not giving a sensitivity. It is very early in that program, and it depends on which policyholders accept, there are specific characteristics, there are specific circumstances and also how markets develop between now and the uptake of the offer. So if it's okay with you, we'll look to come back in 3Q or 4Q with them for the details.

And just a follow-up. You said you've spoken to advisers. And clearly, the program was launched about a month ago. Can you say a little bit more about the progress?

Duncan?

No, in short. So you're right. We did -- obviously, we've been working on this for several months, and we -- as you launch it, there's a lot of execution, which goes around it. One part of that is making sure that we have feedback prior to the launch, and we've obviously have feedback since then, which have been constructive. So it's really early, Michael, in some ways very early, customers have to be engaged or thereby. So we're not expecting to get more information really until a couple of months from now.

And we'll now take our last question from the queue from Farquhar Murray from Autonomous.

Just two questions, if I may. Firstly, on capital generation and remittances, you seem to have increased the capital generation target for year '21 by about €0.6 billion versus where we were in December. And on the kind of cash flow remittance side, you seem to be basically talking towards the upper end of the cumulative range, which I think adds about €0.3 billion. Can you possibly just explain whether there's something to that gap between the 2? Or is this kind of a bit more of a conversation for the end of the year? And then secondly, turning to the variable annuity actions and, in particular, the RBC and cash flow generation impact. Could you just clarify that those are based on end of June market circumstances? And might you just be able to outline the sensitivities around those impacts, just so we understand how they could vary between here and the closing at the end of the year?

So let me -- thank you very much, Farquhar. So let's start with Matt on the cap gen question and then Duncan after that, the VA question.

Yes. So on the operating capital generation, you said, is it more of a conversation from the end of the year, we'll see how the year turns out. I would just say that, so far, the progress has been actually quite good, both in terms of implementing the operational improvement plan, but also the macroeconomics have been favorable for us. So those are the tailwinds. The way we kind of think about it is that we've kind of drastically reduced the downside risk in the overall targets that we put out at the Capital Markets Day. So all that is kind of encouraging. But to be clear, we are still early in the transformation, and we do have a lot of work to do. You could say that we're perhaps late in the economic cycle, and we do want to be cautious about the outlook for credit markets, for example, but also COVID claims if we get into a second wave in the U.S., as we come out of the COVID-19 pandemic. So we're not changing our guidance at this point in terms of remittances, only to say that we are now guiding towards the top end of that gross remittance guidance for the 2021 to 2023 guidance that we've done at the Capital Markets Day. So we had that at €1.4 billion to €1.6 billion. So now we're thinking more like €1.6 billion. But clearly, the progress that we've made in the capital markets have helped us along here. We are guiding more towards the top end.

Thank you very much, Matt. So Duncan?

Farquhar, no, they're not based on 2Q. They're based on current circumstances. And with respect to additional guidance, it's a bit tricky. And the reason for that is there's obviously quite a few variables here in terms of the take-up rates from the buy-out program, which will in itself may be influenced by equity markets and interest rates. And then also the implementation of the dynamic hedges also the impact of that could be influenced by equity markets and interest rates, plus the fact that we put in a partial hedge several months ago as well, which is on rates that should apply some mitigation. However, we feel fairly confident that the -- as I have indicated in our presentation that the net of that is going to be no worse than 5 percentage points on the RBC ratio, barring really extreme market movement. So we feel pretty comfortable with that guidance.

Just as a follow-on, does that kind of extreme circumstances carried through to the capital generation indication as well?

The capital generation, the USD 50 million adjustment to the capital generation is mostly driven by -- it was driven by 2 things. One is a lower level of required capital being released because we're effectively transferring capital into reserves here. So that may get slightly impacted by rates and equity markets on implementation because that will impact how much required capital is being impacted. But as I said, the 5 percentage points, that should be fairly range bound. And the second impact is the impact of the hedge on the equity market from the DB book of business, where the operating capital generation we assume a equity market return, and we no longer capture that and so I don't think it's meaningfully impacted by market circumstance.

With this, I would like to hand the call back over to Lard Friese, Chief Executive Officer, for any additional or closing remarks.

Thank you, operator. This is Jan Willem. This concludes today's call. Thanks again for your continued interest in Aegon.