Good day and welcome to the Aegon Q4 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 Willem, Head of Investor Relations. Please go ahead sir.

Thank you operator. Good morning everyone and thank you for joining this conference call on Aegon's fourth quarter 2021 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. With me today are Aegon's CEO, Lard Friese; and CFO, Matt Rider who will take you through the key points of this quarter. Let me now hand over to Lard.

Thank you, 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 fourth quarter results. Matt Rider is also with me today and he will walk you through the details of our results, our capital position, and the actions we have taken to maximize the value of our financial assets. In my part of the presentation, I will take you through the strategic highlights and the progress we have made on our strategic assets in the last year. So, let's turn to slide number two. In the fourth quarter of 2021, we made good progress in achieving our financial and strategic commitments. And I'm encouraged to see this reflected in our results this quarter but also when I look back at the full year. Our fourth quarter operating results decreased only slightly to €470 million despite adverse claims experience, which was mainly driven by COVID-19. The result was supported by increased fees from higher equity markets and a positive contribution from business growth. Throughout the year, we maintained an intense organizational rhythm to realize our ambition to transform the company. To-date, we have executed 844 out of 1,200 performance improvement initiatives with expense initiatives representing the majority. As a result, we remain on track to deliver on our $400 million expense savings target by 2023. We continue to invest in the expansion of our distribution network, while simultaneously improving the digital experience for customers, advisers, and employers. This resulted in solid growth in our US life business, record high asset balances in our Dutch mortgage and defined contribution businesses, and net deposits on the core UK platform turning positive. In asset management we had our 10th consecutive year of positive third-party net deposits. However, there is…

Thanks, Lard and good morning, everyone. Let me start with an overview of our financial performance over the last year on slide 9. On the back of the €244 million in expense savings achieved so far, our operating result increased by 11% to €1.9 billion. This was helped by increased fees from higher equity markets and positive contributions from business growth. These were only partially offset by adverse claims experience in the US mainly attributable to COVID-19. Cash capital at the holding increased to €1.3 billion on the back of more than €1 billion gross remittances from the business units to the holding this year. Remittances were partly supported by the distribution of excess capital from several units which brought us free cash flow for the year to €729 million. Since mid-2020 we have reduced our gross financial leverage by €700 million and now stand at €5.9 billion. This puts us on track to meet our target of reducing our gross financial leverage to between €5 billion and €5.5 billion by 2023. Our balance sheet remains strong with the capital positions of all three of our main units above their respective operating levels at the end of the year. Group Solvency II ratio increased by 15 percentage points during 2021 to 211%. Over the year, we have actively managed our risks and our capital position. In the US, we have nearly completed the interest rate reduction plan. We have also extended the dynamic hedging program to cover the entirety of our legacy variable annuity program. Furthermore, we have completed the lump-sum buyout program for certain variable annuities, reducing risk and doing so at both favorable terms to customers and shareholders. And we have seen continued success in our long-term care rate increase program. Last quarter, we indicated that we wanted…

Thank you, Matt. Slide number 20 is a takeaway from today's presentation is that we are making steady progress in achieving our financial and strategic commitments. And I want to take this moment to also thank our employees, who throughout 2021 have worked tirelessly to progress towards our goals. And encouraged by the progress this year, we are fully energized to continue our transformation journey in 2022. I would now like to open the call for your questions. And in the interest of time, I kindly request you to limit yourself to two questions per person. Operator, please open the Q&A session.

Thank you. [Operator Instructions] We will now take our first question from Andrew Baker from Citi. Please go ahead. Your line is open.

Great. Thanks for taking my questions. So, the first one is on your €1.2 billion capital generation outlook for 2022. So if I annualize the €400 million normalized quarterly cap gen that you referenced at 3Q and then deduct the €150 million for the COVID claims gets me to about €1.45 billion. So just hoping you could help me bridge back down to the €1.2 billion that you're referencing? And then the second one is on cash conversion. So, for 2022, if I look at your guidance, it looks like the cash conversion around 60% or so, so free cash flow divided by operating capital generation after Holding company costs. So, I'm just wondering when you expect this conversion rate to increase what you need to do to sort of close this gap. Thank you.

Okay. Thanks for your question. I'm going to try to walk you through the sort of how we get to the $1.2 billion guidance for the 2022 operating cap gen. So I think it's easiest for us to start from the actual operating cap gen before holding in funding expenses for 2021 and that came in at about €1.425 billion. So let's begin there. Next thing you have to do is adjust for the variety of management actions that we have taken over the course of 2021. So this would be -- these would include the, I'll say, the longevity reinsurance deal that we did in the Netherlands. We did the VA hedging and the ALSO program in the US. We've taken some actions to reduce mortality risk. We've done a little bit of pension derisking in the United States. And if you think about all those actions combined, -- if you think about a reduction of operating capital generation of about €150 million about. The next thing you have to do is kind of think a little bit about, okay, what let's think about the puts and takes for COVID mortality and generally excess mortality over the course of 2021 versus what we expect for 2022. And here if you do the math on it if you sort of deduct the 2021 adverse claims experience in the US, it's about €125 million. And we're signaling today that we would expect something like €150 million back in 2022. Once you add in sort of, let's say, the drag from lower reinvestment yields that we would expect because interest rates still are at low levels then you get to around that €1.2 billion level. I think that can -- there are many, many different ways to bridge this when I recognize…

Great. Thanks, Matt.

Thank you. We will now take our next question from David Barma from BNP Paribas. Please go ahead. Your line is open.

Good morning. So my first question is on the actions taken on the U.S. Universal Life book. Can you help us put those -- the few numbers you gave on the mortality reinsurance in the context of the risk associated with that block of business please? And also, do you think this could ultimately make third-party options possible, that is for part of the universal life block with secondary guarantees? That's my first question. And then secondly, coming back to cash. Can you remind us what the requirements are for excess cash distribution from Munis? And at what point would you consider the -- this life book to be there? Thank you.

Okay. So maybe first on the actions that taken to reduce mortality risk. We've done a couple of things. The first is the reinsurance transaction with Wilton Re that I think you're referencing. This is a book of high-face amount secondary guarantee universal life contracts. And some of that book is related to what's called stranger-owned life insurance contracts, which are basically owned by institutional investors. So what we've done -- I think the numbers that we've given you are that, we take a 12 percentage point hit to the RBC ratio. But important to note that about half of that is related to another transaction that we're in the process -- or have funded, let's say, in the fourth quarter. And that relates to another program where we are planning on buying back from those -- from institutional investors a portion of that stranger-owned life insurance contract, solely contracts. So of the 12 percentage points on the RBC ratio, about half of that is coming from that, let's say, prefunding of the Stoli transaction. So what does that do for us? So on the straight reinsurance transaction with Wilton Re, we got rid of some Stoli exposure. We get rid of some high face amount exposure on mortality. But importantly and I think you've seen this over the quarters with Aegon and Transamerica in particular, you do get mortality fluctuation as a consequence of these high face amount contracts. So the idea is we're doing this to be able to tame some of that volatility. Just to put it in perspective, for the deal with Wilton Re, I think it's about, we have maybe a $42 billion space amount book of universal life with second year -- secondary guarantees. We've done about, let's say, only 9% in the reinsurance…

Thank you, Matt.

Thank you. We will now take our next question from Michael Huttner from Berenberg. Please go ahead. Your line is open.

Fantastic. Thank you. And thank you for all these numbers. I have two questions. The first one is your cash is now at the top end or the top half of your target range. And you're raising your free cash flows, but there's going to be more coming, the dividend seem actually cost that much. What's the plan for this cash, particularly if at some stage the Vienna Insurance disposal does get ahead? The second is, can you just go back on that US mortality. So my understanding is -- well, my understanding is confused. I'm really sorry. I know you explained it, but I'm not -- I'm simply really slow. The -- you did a deal funded by Solvency, I don't know how that impacts the earnings which reduces -- presumably reduces the cost of mortality, but you're still saying mortality will be higher in 2022 than 2021. I don't get the benefit of the reinsurance deal. How come? If you could maybe address that it would be helpful. Thank you.

Yeah, Michael, so this is Lard. Let me start with the first question about cash capital. And then Matt can you then expand on the US mortality. So we have -- we were pleased that the capital position has developed the way it has done. We're now 1.3 billion in the cash back in the Holding Company. We want to keep -- as you know we have a clear policy for that. We want to keep the cash back for the Holding Company between 0.5 billion to 1.5 billion. And with 1.3 billion we're indeed at the higher end of our cash capital buffer. And the way we look at that is we give quite clear guidance on the Capital Markets Day on how we think about that. We want to ensure that in this let's say large-scale strategic financial operational and cultural transformation of Aegon, we are able to do that program and to implement that program well and that informs us to have the financial flexibility to do so. That's one thing. Secondly, we also have a leverage reduction target. And you get to 5 billion to 5.5 billion leverage position we are currently at 5.9 billion. So there's still work to be done there. And for the remainder, we said any excess -- any cash that we would have that we do not need for the implementation of our plans and keeps us in a good stead also looking at macroeconomic developments at markets and taking everything into account has a clear priority. And that is that, if it's – that goes back to stockholders in the form of dividends or buybacks at the time that we believe that is appropriate. So that's our policy and that is how we intend to behave. On US mortality?

Yeah. So one thing on the deal with Wilton Re and reinsurance in general one of the main roles of reinsurance is to reduce the amount of volatility that we have in our claims. So you could have a management best estimate for what your mortality is, but it could come in very lumpy and we've actually seen that in the past quarters. And we have – and part of it is due to very large face-amount contracts. And again, part of it stranger or owned by investors. So the goal of the reinsurance is to really smooth that out over time but again to stabilize our earnings and capital generation over time. So that's the first one. The second one is that the increase in the, let's say, the excess claims expectation is simply a consequence of COVID. I mean, we are expecting at this point in 2022 something like 300,000 US population deaths for – related to COVID-19. And it's quite a staggering number relative to where we are today. So it just say, it's a COVID factor.

I understand – my question is if you reinsure and it costs you and you still have higher cost I don't get – I don't understand it. It sounds as if it's all negative it's not offset anywhere from the reinsurance. It's like you're paying money for nothing. I'm sensing here. So I'm trying to explain, why I'm still confused?

No, I think so. But so let's take it to maybe piece by piece. So we have like COVID claims, right? So we have an increased expectation for mortality going into 2022. We do get reinsurance offsets from that. We are getting the benefit from those excess claims through reinsurance that we have on our total book of business. I think the difference is that on the new – on this newest reinsurance deal that we've done, the idea is that we want to again tame the volatility in the claims experience and that came the earnings and the capital generation. That's why we came to that.

Understood. Thank you so much. Thanks for taking the question.

Thank you. We will now take the next question from Farooq Hanif from JPMorgan. Please go ahead. Your line is open.

Hi, everybody. And thanks for some really great improvements here in the results. Two questions. Firstly on inflation risk, so qualitatively, I know that a large proportion of your life book is fixed is nominal. But are there any areas where there is an inflation linkage how is that hedged? And then what's the impact on your better liabilities from higher wage inflation and salary inflation and cost inflation, so just the whole inflation topic and how well hedged do you feel about that? And then secondly, going to the US Retirement book, can you sort of give us maybe an outlook for when you think certainly the larger plan kind of segment that you'll start to see a tempering of those net outflows and kind of what you're seeing when you talk to your customers there? And also the ramping up of the middle market and the smaller schemes when – I mean, do you think 2022 is the transition year, or do you think we'll start to see some fruit? Thank you very much.

Maybe I take the first one on the inflation risk. So you asked specifically to what extent do we have contracts that have inflation-linked elements to them. This is largely, largely, largely sitting in the Dutch book. So we have pension contracts that could have indexed pension benefits. And on the pension benefits, we have – we fully hedge that for the expectation for the inflation expectation element. Now there's another part to the Dutch Life book and that is the – we do build in an expectation for let's say maintenance expenses in our management best estimate of expenses which includes inflation. And that's part of the best estimate liability that we come up with. And there we also have hedging in place. We'd actually expanded it in the first couple of weeks of October last year to include that. So really on the Dutch book of business, where there's contract links to inflation, we have basically full hedging in place for that. In other areas of the world, we are subject to inflation risk just on -- just the normal wage inflation those sorts of things. It shows up in the US and in the UK. In the US, it's a special situation in that we have a long-term care book where you can end up with inflating cost of long-term care. But there we have caps with respect to maximum daily benefits and maximum policy benefits, which make it so that if there is a lot of inflation that it ends up going for the account of the customer rather than the company. And I always have to remark on this one that with respect to the long-term care we always say these -- that we're doing these premium rate increase programs. We do actually get the customers different options for this. So they can -- instead of paying the increased premium on the full amount of the contract they also have the option to reduce the benefit and then that reduces our risk obviously on inflation. And like -- I think Lard had mentioned earlier that any time you have inflation that is accompanied by rising interest rates that's a different proposition in that. Then on capital generation we start to show some improvements. And for example reinvestment rates on the amounts that we reinvest all over the world and particularly in the US. And it's -- so if it's accompanied by higher levels of interest rates that we can benefit.

Yeah. Thanks. And I'll take the mid-markets and the US retirement book. So what we're focusing in the US is really on the mid-market because we believe -- and let me remind you that we believe that we can number one have a capability there that we want to expand. Number two that we are able to extract higher margins and command a better pricing position than we could do to go in the large markets. So while we play in the large-scale market, we really focus on the mid-market. And actually we're seeing very good momentum in written sales. I mean 33% up for the year full year. That's a pretty impressive number. And that is a clear, let's say a result of the improved focus and capabilities that we have built and that we're leveraging on. So that's really good. Now there is a time lag though, so you can write these new sales but before the asset balances really all these new plants come into your books there's a time lag. So that's the first thing you need to bear in mind. The second one is that we indeed saw withdrawals and the increase in withdrawals were driven by the increase in equity markets, which led to a higher dollar amount of withdrawals but the rate of the withdrawals remained stable. So the rate of withdrawals remain stable didn't get worse. It's more that the balances that you transfer out are increased because of equity markets lifting those account balances. So on the gross deposit side roughly half of the inflows are driven by contributions that are mainly wage growth and do not benefit from the increase in equity markets in recent years. So that's another effect that I think you need to take into account. Now when will that dynamic turn? Well, we've now seen quite a number of quarters where we have more than one billion written sales. So if we continue this progress at a certain point that will flip, let's say the total net flows will flip in the right way. There's not an exact timing for that because it depends again on how fast the plans that are leaving us, the amounts are transferred off your P&L in your balance sheet and where the written new sales are coming in. So there's just a time lag there. But over the time that needs to flip as we continue our progress in selling these plans.

Okay, great. That’s clear. Thank you very much.

Thank you. We will now take our next question from Steven Haywood, HSBC. Please go ahead. Your line is open.

Thank you. Good morning. Did you mention on the call that you would update us about third-party solutions for your VA book and the first quarter results stage. Is that correct? And what, kind of, solutions are you investigating on that? And secondly, I think you mentioned this earlier about being Solvency II ratio of each unit is above your operating level but you're not willing to upstream excess capital out of these units currently to reach that operating level due to your the near-term view of the markets and the capital required in this business. Is there any point in time that you think there might be more excess capital to the upstream from the business units rather than the regular recurring upstream? Thank you.

Yeah. So first -- Steven, hi this is Lard. First the -- I'll take the first one and Matt maybe you can take the second one. First one, on the VA book, indeed, we will give an update on that in Q1. Last time we said that we would come back to you in the first half of 2022. And we've now made that more precise to say that we will do that during the Q1 update. As we said last year, we focused -- so we have a framework right, in which we look at the financial assets. We -- there's the unilateral transaction -- unilateral -- not transactions but unilateral actions that we can take. An example of that is the expansion of the hedge program, the dynamic hedge program which we have implemented in the back end of last year. We have, also what we call bilateral actions and those are actions where we cannot only decide ourselves, but also need regulators to approve it. An example of that would be the long-term care rate increase program for which we need approval from various regulators. And we are as Matt mentioned on the call well on our way versus our target for those rate increases. That's an example of that. And then the third concept that we use is, exploring third-party transactions. And we have said last time with respect to the VA book that our focus was really on getting the dynamic hedge in place and focusing on the ALSO [ph] program which we've now successfully concluded with an 18% take rate. And that we would deploy resources and relocate that now to investigate what are we thinking about that large book? How are we going to act? We're going to give you an update at the Q1. I think Duncan Russell at the time I gave an overview of many considerations that we take into account. So we cannot say anything at this point in time. We're still doing the work. And we will update you in Q1, at the Q1 results, so Matt maybe over to you on the, upstream points.

Yeah. So I think on your second question one thing to be very clear, I think this quarter actually shows that we are perfectly willing and able to upstream excess capital out of business units if we can do it, right? So, the U.K. the Netherlands Bank, and the TLB, so we're showing that we are able to do that, I think your question is, at what point would we be able to do even more? With the Netherlands, I would say, at this point focus -- full focus is really on get them to be a regular dividend payer. That's why we upped our remittance target by 100% in the -- for 2022. And in the U.S. let's also recognize that there are some potential headwinds we don't know. Coming out of the COVID environment are there going to be credit implications? Are they going to be equity market implications? We know we still need to fund the operating improvement plan. But most importantly, you do want to operate the U.S. to a level where we can invest in organic commercial growth. This is of course a giant strategic asset for us. And we are perfectly willing to invest in that business through new business strain as long as it's profitable new business group.

Thank you.

Thank you. We will now take our next question from Robin van den Broek from Mediobanca. Please go ahead. Your line is open.

Yes. Good morning everybody. Thank you for taking my questions. First one is on OCG. I appreciate everything that's been said on 2022. But I was wondering if you're willing to think a little bit more about 2023, considering stable equity markets, what the outlook could be there? And also, what kind of remittance ratio we might see for that specific year? And I'm asking, because, I think your free cash flow update today is sort of pointing to a cumulative delivery of €2 billion assuming a stale delivery on 2023. But I'm assuming that the 2023 delivery could be materially better than I think the €700 million you budgeted for initially. And then secondly, on leverage you clearly said that the €5 billion to €5.5 billion target sort of ambition remains in place. But I thought initially you set that target also because of the fixed charge cover that was supposed to be -- was not at the level that you wanted it to be. And presumably that situation has changed. And in relation to that your CE asset disposal was sort of the bridge to getting you to that level. And at the moment, it seems like you might need less of that cash inflow to get to that ambition. So is there a potential that part of those disposal proceeds already would feed into a buyback? Thank you.

Yes, Robin. So thank you very much for your questions. Let me take the last one Matt and could you cover the first one? So we've -- I mean, we're quite clear right. So we gave a leverage reduction target to be to 5 billion to 5.5 billion. And as you know, we are -- we really work hard to get to our targets, right? So that's not going to go away. And we're at 5.9 billion today. So we still aim to get to that 5 billion to 5.5 billion position, and still have work to do there. At the same point in time, as I said earlier, we are now at 1.3 billion cash capital in the Holding Company that is pre any proceeds that would come in from the transaction you were referring to. And I can just repeat the answer that I said, which is the gate, which is we are committed to our leverage reduction program. At the same time, we have a 500 million to 1.5 billion in which we want to keep the cash capital bucket. We're currently operating at 1.3. We have announced a proposal to our stockholders' meeting of 0.09 EPS for the final dividend for the year, so you can do the math around that. And then any excess cash that we have and that we do not need for our business given the large scale transformation is something that as a priority and that priority is that it goes back to stockholders either in the form of dividends or buybacks. Matt?

So maybe on the 2023 operating capital generation outlook, in the presentation, we gave you a 2022 outlook, because we want to get everybody to sort of guide you as to what to expect for 2022, but it's an excellent question. I'm going to start on this one from, just kind of bridging you from where we were to, I think, where we're going to get to. So at the Capital Markets Day, we talked about a €1.3 billion outlook for operating capital generation before holding and funding expenses. And I'm picking that number, because that doesn't -- that's not polluted for COVID, because we had assumed that we were already out of the woods there. And so that's -- it's an important point to start from that 1.3 billion. Now what has changed since the Capital Markets Day is that the markets have performed far better than what we would have expected. And that's where we talk about something like maybe a 300 million tailwind that we've got. And then you saw that from the operating cap gen in 2022. Originally, we had guided for 1.1 billion for -- sorry for 2021. Originally, we guided for 1.1 billion in 2021. But then -- but we ended up at over 1.4 billion. A lot of that was due to markets. So as long as markets kind of stay in this kind of a range, we have benefited from higher equity markets and we have benefited from higher interest rates. So kind of start with that 1.3 and then think about we're probably 300 -- we're probably 300 million ahead of that. And if things continue then that will be retained in the 2023. Now after that you got to deduct the management actions that we've taken. So I've called out…

And on remittances from a – on?

Remittances – so let's say the – for the Netherlands, we would expect at this point, we would continue with the €50 million per quarter. For the US, we will see that you can rely again, given current markets on the remittance levels that we've gotten out so far maybe ticking up a little bit. We want to be – again, this is one of the reasons why we didn't give so much guidance for 2023. We really want to see that operational improvement program kick in in the other country units as well.

But in this bridge, you're not really putting any OCG value to the operational improvement that's still to come. Why is that?

There actually is a benefit in it and it's about let's call it €100 million that's going to be embedded in there.

Okay. Thank you/

But the important thing is that the €100 million would have been embedded in the 2023 guidance that we gave at the Capital Markets Day anyway. That's why the – that's why we are getting a benefit from the point bridge from 2023 than then you don't pick it up. It's – I'm sure IR can help you with the various different ways of bridging to get to it. But at the end of the day you will come to a number that is in that €1.5 billion range OCG in the business units for 2023.

Thank you.

Thank you. We will now take our next question from Nasib Ahmed from UBS. Please go ahead. Your line is open.

Thanks. Thanks for taking my question. So the first one. you mentioned the reinsurance transaction with Wilton Re. I they think reinsure long-term care books in the past. So given you've got a relationship there I was wondering if there's anything you're planning on doing in the long-term care book, or do you think that you're the best owner of the book at the moment? And then secondly, sorry to come back on the variability book. Just a quick question here on the side of the book and sort of the appetite for third-party transactions in the market. Do you think you can do a transaction given the size of Aegon's book of 80 billion, or it's going to be in a couple of transactions? And what's your thinking there is going to be – I think you've meant reinsurance in the past that's probably going to be the likely solution. And any more actions that you need to take or can take to improve the pricing on the eventually achieved?

Yes, Nasib, this is Lard. Let me take the VA piece. Not much to add to what I said earlier. We have – we will give you – we will give the market an update on our considerations at the Q1. So I think speculating about all the potential solutions that would be available or not available to us I think is at this point not I think very helpful. So we're working hard on it. We've done a lot of work on the VA book and we aim to give you an update in Q1 – the Q1 results. So maybe Matt over to you.

Yes, on the – so maybe first on the VA book, everything Lard just said is perfect. We can't take small management actions on that book. So for example, we have done rider rate increases where it's possible. So this is really as a financial asset, we think of it as a hunt for capital leave no stone unturned. But I would say on that kind of thing it's relatively small in the grand scheme of things, but I just want to point out that we're actively working these things. On the long-term care reinsurance, we are going to be the best owner of this. There is no appetite in the market for reinsuring a big block of long-term care business. I think that we have shown that we have been effective in getting premium rate increases through the state insurance departments and that's – we are going to be the owner of this book for quite some years. But again, it looks like we've been pretty effective at managing and so far.

Thank you.

I will now turn the call back to Jan Willem for closing remarks.

Yes. Thank you. Thank you, operator, and thanks everyone for the call today for listening to us. As always, if you have additional questions please reach out to Investor Relations. We are happy to help. Have a good day and thank you for your participation in today's call.