Aegon NV Q1 2015 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: David Andrich - Morgan Stanley - Analyst : Hi. Good morning. Thank you for taking my questions. Three questions on my side. First of all, I was just wondering in terms of the increase in operating free cash flow in the quarter, I was just wondering if you could give a bit more detail on the one-off impacts coming through. Second of all, on slide 22 I couldn't help but notice that you drop the indication lines for target level and buffer levels of capital in the Netherlands and the UK, and I was just wondering if there was anything that we could -- anything that we should read from that? And then finally, I was just wondering if you could give any indication or affirmation whether the UK and the Netherlands are also within the 150% to 200% Solvency II range? Thank you.

Question: David Andrich - Morgan Stanley - Analyst : Just wondering if you could give any indication of whether the Netherlands and the UK are within the 150% to 200% Solvency II range that you've cited for the Group number? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2015 / 7:00AM, AEGN.AS - Q1 2015 Aegon NV Earnings Call

Question: David Andrich - Morgan Stanley - Analyst : Okay. Thank you very much.

Question: Farooq Hanif - Citigroup - Analyst : Hi there. Thanks for taking my questions. Firstly, on the 150% to 200% range, you've reiterated it. Obviously stuff has changed. Maybe I can ask it this way. In that 150% at the bottom end of the range are you allowing for adverse development on all of those uncertainties that you've listed on your slide? That's question one. Secondly, long term care has obviously gone up as an issue in the US. You obviously have peers who have also had poor experience. What comfort can you give us that we're not going to see this repeat going forward, particularly given lower reinsurance but also just given lower yields? And the last thing is there's kind of been a change in message it appears to me on the Group ratio. So last time I think we spoke you were worried about the Group ratio being a driver of dividend policy but now you're saying well actually it's the local regulators and how they interpret Solvency II driving internal dividends but at the hold co what we've got is what we've got. Can you just explain why you've changed that message? Thank you.

Question: Farooq Hanif - Citigroup - Analyst : Can I just come back on that quickly? So obviously the solo ratios drive cash movements in the Group but you seem to be suggesting that in terms of your overall dividend policy -- is that what you're saying? Your overall dividend policy is not really going to be determined by that? Is that correct or not? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2015 / 7:00AM, AEGN.AS - Q1 2015 Aegon NV Earnings Call

Question: Farooq Hanif - Citigroup - Analyst : Okay. Thank you very much. Thank you.

Question: Farquhar Murray - Autonomous Research - Analyst : Morning gentlemen. Just two questions if I may, both around capital. Firstly, when Aegon originally introduced the buffer and target thresholds for the S&P level, the intention was to upstream anything above the buffer level. Yet if we look at the upstream of $700m in the second quarter, that would still leave you running somewhat above the buffer level, and I'm just wondering what's the rationale for that. And then secondly on Solvency II, where are we with regards to discussions around the RBC conversion ratio? I think the Solvency II projection for [1116] of 150% to 200% assumes a 200% conversion factor but there always seemed to be a possibility that it could be somewhat higher than that. I'm just wondering where the debate is possibly heading on that? Thanks. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2015 / 7:00AM, AEGN.AS - Q1 2015 Aegon NV Earnings Call

Question: Farquhar Murray - Autonomous Research - Analyst : Okay. Thanks very much.

Question: Ashik Musaddi - JPMorgan - Analyst : Hi, thank you and good morning everyone. Just a few questions. First of all on leverage, it looks like you're indicating you can re-lever the balance sheet a bit. Can you give us some indication as to how much will that mean? So, for example, 1 percentage point you mentioned is $400m cash at the holding company; what would that mean from Solvency II number perspective? And is 30% a max number that you would look to go to? And what will be the main driver of that basically? Is it covering for solvency or doing M&A etc? That's the first one. Secondly, you're talking about fungibility on the Solvency II so I guess this is in -- you mentioned it earlier as well, Darryl, but just some more color. Is fungibility totally dependent on local ratios or there is more to that? So for example when we need to think about fungibility from US, is it purely dependent on RBC and your buffer level target or is there anything else determining that as well? And thirdly is what is the right number for the holding company cash flow? Because you are currently running at $1.4b, you're getting a good decent cash from US in second quarter and hopefully, if you can do it, in line numbers for next three quarters in US, you'll be getting a chunky dividend again from US. So that means by the end of the year we will end up at around $2.7b, $2.8b of cash at the holding company. So what are we missing on that? What sort of level are you planning to run that? Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2015 / 7:00AM, AEGN.AS - Q1 2015 Aegon NV Earnings Call

Question: Ashik Musaddi - JPMorgan - Analyst : I get your point on this point but just a bit of clarification. So I think you mentioned you'll be trying to run at the top end of the range which is around $700m and you just mentioned $300m as a normal -- $300m is around the normal cash flow so you get around $900m in the next three quarters. So that means still then if you upstream that $900m it's still a big number. I'm not saying you'll do that but still it looks like if you want to retain at around $700m capital in US it's still -- there is a lot of flexibility in that?

Question: Ashik Musaddi - JPMorgan - Analyst : Okay. That's very clear. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2015 / 7:00AM, AEGN.AS - Q1 2015 Aegon NV Earnings Call

Question: William Hawkins - KBW - Analyst : Hi. Thank you very much. Can we just talk a bit more about the US mortality losses and where you have confidence that we're seeing one-off bad luck and where you don't have that confidence. So maybe a bit more detail about the contracts that are affected, the type and the origin, specifically in the context of the fact that you just changed a lot of mortality assumptions six months ago. And I suppose finally on that point, can you also talk a bit about what you're seeing gross versus net in your experience because again you flagged your changes in reinsurance experience. And if your gross experience isn't changing and this is just a change in net, then to me that would be very clearly a trend rather than one-off. So more color on that would be helpful. And then secondly, in the UK, it looks like you have seen, as expected, a good spike in conversion onto your platform in the first quarter after the FCA approval. Can you just comment generally? Does that mean that we're now seeing conversion rates that are more in line with your expectations? And given that we're looking at about GBP900m for the first quarter, how could that look in the next few quarters because I think you have indicated that that could be lumpy this year. Thank you.

Question: William Hawkins - KBW - Analyst : So, Darryl, have you already launched a review of assumptions in the context of these figures? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2015 / 7:00AM, AEGN.AS - Q1 2015 Aegon NV Earnings Call

Question: William Hawkins - KBW - Analyst : Great. So for now that upgrade is on track with your expectations.

Question: William Hawkins - KBW - Analyst : Cool. Thank you.

Question: William Elderkin - Goldman Sachs - Analyst : Thank you and good morning everyone. A couple of questions, please. Just back on the US and the one-time effects, my understanding of your answer to the previous question was really none of the adverse movements we've seen in the first quarter should be structurally recurring in terms of the kind of earnings model guidance you've provided. But could you just clarify that? Secondly, back on the UK. I know you've had very positive inflows that you've just discussed. I'd say your press release has some quite cautious statements related to the UK as well. Can you give us a sense of what the lapse experience has been on the back book over the second quarter so far? Secondly, has the UK business in terms of its cost structure really reached your target level or are there further cost improvements that we should expect to come through? Then thirdly, in terms of the effect of the DWP pricing cap, I guess that comes through in on revenues in the second quarter. But I think you've also warned that commission payments are likely to continue through into 2016. And I was wondering, does the 20m to 25m annual earnings impact you've given in relation to DWP still hold for this year given that you've got the revenue hit but no offsetting commission effect? If you could just clarify that. And then finally, completely separately, you seem to be making fairly positive noises on capital and capital generation. Is it still reasonable to expect a so-called capital return in relation to the preference share transaction, I think at the beginning of last year, in this calendar year? Thank you.

Question: William Elderkin - Goldman Sachs - Analyst : Cool. Great. Thank you.

Question: Nick Holmes - Societe Generale - Analyst : Hi there. Thank you very much. I just wanted to follow up, sorry for pressing you a bit further, on the mortality issue. Is it -- can we infer from what you're saying that on balance you think that the likelihood of another big mortality reserve review which would trigger another big hit this year is really pretty remote? That's the first question. Second question is looking at your ROE target of 10% to 12%, what would you say about that at this stage of the year? What should you -- what guidance would you give on that? And then looking at, just last question, looking at variable annuities, you said that there were some product adjustments you've made in the last couple of quarters. Just wondered if you could take us through those and how they could affect sales this year. Thanks very much.

Question: Nick Holmes - Societe Generale - Analyst : Okay. Thank you for that. Can I just, sorry, come back very quickly on the ROE target, 10% to 12%? Would you, if you were to take out the one-offs, mortality, other things, would you be confident that the underlying ROE will be in the range of -- in the region of 10%? Is that what you're realistically hoping for?

Question: Nick Holmes - Societe Generale - Analyst : Okay. Thank you very much.

Question: Gordon Aitken - RBC - Analyst : Thanks. Morning. A couple of questions please. First on Solvency II transitionals. We had several UK companies said last week they would be using transitionals. So the question is will you be applying for a transitional deduction from your technical provisions? And, if so, in respect of which legal entities? And if you could just talk a bit, will it limit dividends from those legal entities? And the second question is you've clearly upstreamed -- you've said you'll upstream the $700m from the US business. When do you expect to next pay a dividend or upstream a dividend from the Dutch subsidiary and the UK subsidiary, please? Thanks.

Question: Gordon Aitken - RBC - Analyst : So it could be this year from the Netherlands?

Question: Gordon Aitken - RBC - Analyst : Okay. Thank you.

Question: Steven Haywood - HSBC - Analyst : Hi. Good morning. I see that the US value of new business dropped dramatically in the first quarter this year, obviously because of the low-yield impact. And you've done quite a lot of product changes here as well. So do you think that due to these product changes this impact will reverse throughout the rest of this year, or is there more product changes that will be required, or has the yield also changed again since the first quarter and therefore the product changes need to be implemented further? And then also just a random question on your fair-value items. Now for once they were in line with what consensus was going for, but do you ever see the absolute size of these reducing any time in the future?

Question: Steven Haywood - HSBC - Analyst : Okay. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2015 / 7:00AM, AEGN.AS - Q1 2015 Aegon NV Earnings Call