Aegon NV Q3 2015 Earnings Call Transcript

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

Question: Farooq Hanif - Citigroup - Analyst : Hi everybody. Thank you very much. Firstly, can I ask about further risk to fixed annuity unit costs as that book runs down? Secondly, is there not a risk now to US cash flow given that we're seeing this ever-decreasing level of surplus capital in the US? And lastly, what is driving the reduction in US VA sales? It was down 2Q on 1Q and also now down 3Q on 2Q. So what's going on? Is this some sort

Question: Farooq Hanif - Citigroup - Analyst : Thank you very much. Can I just come back quickly on the US cash flow? Would you encourage us to adjust our forecast for the upstream from the US?

Question: Farooq Hanif - Citigroup - Analyst : Yes, in the near term. I know you're looking to mitigate, but would you -- of course you can't encourage us to change your forecasts, but would you say that it's something that's sensible given underlying cash flow is going to be lower?

Question: Farooq Hanif - Citigroup - Analyst : Thank you very much. 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. NOVEMBER 12, 2015 / 8:00AM, AEGN.AS - Q3 2015 Aegon NV Earnings Call

Question: Ashik Musaddi - JPMorgan - Analyst : Yes. Hi. Good morning Alex. Good morning Darryl. Just a few questions. First of all, can you just give us a bit more update on this model update? What I'm trying to understand here is is this an acceleration process you're doing ahead of your investor day or is it business as usual, i.e. there are many more model updates we should expect going forward as well, because clearly this has been a phenomena of your results for quite a few quarters now. For example, like in this quarter we were expecting a big model update change or assumption change on mortality, whereas it was fixed annuities-related this time. So how should we think about that? That's the first one. Secondly is, given your capital has gone up quite a lot, IGD 206% to 225%, is it sensible to read across that your Solvency II position must have improved as well on the back of that? And do you really see any risk of capital raising because the market is clearly worried about your capital position? So that's the second one. And thirdly is, related to that, that your Dutch capital has improved materially to 250% Solvency I, which I would assume, say, give or take around 160%, 170% Solvency II. How should we think about cash flows from Netherlands, because I think this has been an issue in the past that you are not really expecting to extract cash out of Netherlands. But do you think that the Dutch business is in a good shape to start extracting cash or do you think it's just too early to talk about that? Thank you.

Question: Ashik Musaddi - JPMorgan - Analyst : Yes. Just to follow up on that before we go into the other question, just to follow up on that, should we be expecting a bit more update on this at your Investor Day as to what are your plans in coming quarters in respect to model updates, because this has been one of the biggest noise that we are seeing in your results for quite some quarters? Or is it worth saying that these things will more or less end? I'm not talking about small model REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 12, 2015 / 8:00AM, AEGN.AS - Q3 2015 Aegon NV Earnings Call update, that's fine because that's part and parcel of a life company. But is it fair to say that once you are done with your strategy update, probably these things will not recur after that?

Question: Ashik Musaddi - JPMorgan - Analyst : Yes. And just to follow up on that second point, in last quarter, if I remember correctly, you did mention that you still have a lot of levers to be pulled and not thinking of capital raising. Would you stick with that argument at this point as well?

Question: Ashik Musaddi - JPMorgan - Analyst : Yes. Thank you. That's very clear.

Question: William Hawkins - KBW - Analyst : Hello. Thanks guys. First of all, could you just give a bit more clarity on what's driven the impact on earnings that you've guided to? You've mentioned a lot of different things that have hit the 3Q. When you're talking about the EUR20m to EUR25m recurring, what exactly is driving that? And then just more philosophically, I don't really understand accounting, but the whole point of taking charges is to reduce the drag on future earnings. So how come we've got a charge from assumption changes and a drag on future earnings, if you could just educate me on that? And then secondly, very briefly, Alex, you deliberately mentioned that figure of EUR532m of profits for the 3Q if we add back the EUR96m charge. Are you suggesting that that is a level that we can annualize, so that's a clean figure? And if not, can you just remind me, apart from the EUR96m you've adjusted, what would be another material thing I should be thinking about if I can't annualize that EUR530m? Thank you.

Question: William Hawkins - KBW - Analyst : So you'd match the $25m with the 209m model charge?

Question: William Hawkins - KBW - Analyst : Thanks.

Question: William Hawkins - KBW - Analyst : That's excellent. Very clear. Thank you.

Question: Jan Willem Knoll - ABN Amro - Analyst : Can you hear me now?

Question: Jan Willem Knoll - ABN Amro - Analyst : Excellent. Thank you. Thanks for taking my questions. On the Dutch market revaluation was obviously a quite large number. Can you quantify the impact on the Dutch IGD ratio and what the impact was of the other market movements? And can you also indicate how much organic generation there was ex the market impacts and how much that added to the Dutch IGD ratio? And given the strong jump in the Dutch IGD ratio, can we expect a similar movement in the Dutch Solvency II ratio? That would be helpful. And just on the drop in the US excess capital, you mentioned it won't impact the capacity of the US operations in terms of upstreaming dividends. But you mentioned one of the drivers has been a negative impact of the hedging adjustments. Can you explain a little bit more what you did -- what sort of hedging adjustments we are talking about here? And can we expect more of these adjustments to your current hedging programs? Thanks.

Question: Jan Willem Knoll - ABN Amro - Analyst : Yes, just on the big jump you saw in the Dutch IGD ratio I assume that we can see a similar impact, a similar improvement at least, in the Dutch Solvency II ratio. I'm just wondering whether you could have some -- shed some light on that.

Question: Jan Willem Knoll - ABN Amro - Analyst : Okay. Fair enough. Thanks.

Question: William Elderkin - Goldman Sachs - Analyst : Thank you and good morning everyone. A couple of questions. Just firstly, on the Dutch Solvency II ratios, the range you indicated with the second-quarter result, from your commentary can I take it that that range remains robust and a good guide to where you expect to end up? Second, I think you mentioned you expect to get the answer back from the Dutch regulator in December. Will you be letting the market know the outcome of that process in December or will we have to wait until January? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 12, 2015 / 8:00AM, AEGN.AS - Q3 2015 Aegon NV Earnings Call And then lastly, if I remember correctly from the second-quarter conference call, I think Alex you seemed to me fairly optimistic in terms of your, Aegon's ability to return capital to shareholders once the Solvency II modeling process is complete. Are you still bullish if that was a fair description given what you know now? And I think that will do for the moment. Thank you.

Question: William Elderkin - Goldman Sachs - Analyst : No, just on that, what I was getting at is, is the 125 to 150 you indicated, is that bandwidth still good? I'm not looking for an answer within it, but just the bandwidth.

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

Question: Gordon Aitken - RBC - Analyst : Thank you. Morning again. Yes, just a quick one on the -- back to this $20m to $25m charge. Darryl, you said it's a combination of an assumption change and an ongoing drag. Is that common in the US, because it's not common Europe, so if you could just explain that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 12, 2015 / 8:00AM, AEGN.AS - Q3 2015 Aegon NV Earnings Call Second question is on the acquired Mercer's pensions administration business, so you've acquired $71b of assets. What's the average revenue charge on those assets? And if you can just tell us a little bit more about why Mercer's was happy to get out of that business. And are there other potential consultants who are big in administration who also want to get out? And the final question is on the Dutch sales, and they're obviously down a bit, quite a bit. You explained the [exceptional or] the bulk last year, just wondering what percentage of your DB schemes are up for renewal in the third quarter. And if you could say what percentage of those decided to stay with you and which decided to leave. Thank you.

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

Question: Mark Cathcart - Jefferies - Analyst : Yes, I've got a couple of questions. Darryl, you mentioned that you've been driving the company towards a higher level of governance. And now that you're a G-SIFI company, do you think at all that your governance, wider governance needs modernizing? And I'm talking about the foundation that's there to protect the interests of the employees, the shareholders and the policyholders. I understand, and correct me if I'm wrong, that 16 of the 17 on the board are Dutch and one is Canadian, and I noticed that you sold your Canadian business last year. So I'm just wondering do you think the composition of a foundation is appropriate now for a global G-SIFI company. And the second question is that obviously a year ago at Q2 we were told there were going to be Q3 charges, but there was going to be no drag on earnings going forward. But there was a drag on earnings going forward. We were told at the beginning of this year that it was really lower level stuff that was going to be impacting the profitability in terms of modeling changes, but the modeling changes was high if higher I believe than they were a year ago. In addition to which you've now got this drag of EUR100m. So it would suggest that management have got a very low visibility on the future earnings potential of their company. And I'm just wondering where does responsibility within your Group lie? Is it with the Chief Risk Officer? And I notice that the Chief Risk Officer has held that role since 2003. And the third question is in relation to your cheerfulness that your return on equity would be at over 8% without these exceptionals. But how can we possibly trust that we ever get to over 8% if the underlying underlying always comes through 30% to 40% lower in terms of the net income. So those are my questions. Thanks.

Question: Mark Cathcart - Jefferies - Analyst : Yes, sorry just going back to those, but why are all the members Dutch when it's a global company now? Why can't you enlarge the remit of who can actually sit on the board? Why is it people in the Dutch legal profession? Because this could effectively be a blocking shareholder and I'm just wondering if you really believe that's the best corporate governance for the Group as a G-SIFI company, because your policyholders are global not Dutch. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 12, 2015 / 8:00AM, AEGN.AS - Q3 2015 Aegon NV Earnings Call

Question: Mark Cathcart - Jefferies - Analyst : Yes, but you've evolved into a global company. Your company was predominantly Dutch back in 1983.

Question: Mark Cathcart - Jefferies - Analyst : Yes, yes. Thank you.

Question: Nick Holmes - Societe Generale - Analyst : Hi there. Thanks very much. I had a couple of questions on Solvency II. The first is can you tell us what you think of [Jofers] new guidance on the US equivalents? They're saying 150% RBC coverage, which one of your competitors is using. And I just wondered, have you asked the DNB to revisit their decision to increase your ratio from 200% to 250% in the light of this guidance? And then second question is coming back on your capital plans once you have Solvency II in place. I wondered could you tell us, if you are at the bottom end of the range, say at 140%, what are the implications, can you share with us at the moment do you think, for dividend for the share buyback to do with the Association? I think William asked that question about the share buyback. Is that something that you think you would still be committed to even if your ratio on January 13 is at the lower end of your guidance range? Thanks very much. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 12, 2015 / 8:00AM, AEGN.AS - Q3 2015 Aegon NV Earnings Call

Question: Nick Holmes - Societe Generale - Analyst : Okay. So just a quick follow up, you say that the 140% to 170% range is a robust level. In broad principle, would you say at this stage that if you are at the lower end of it, taking into consideration that your RBC ratio is at 250%, others are at 150%, would you say that if you were to come at 140% then that would be commensurately a better ratio than some other peers, and that therefore your dividend prospects, your capital plans would not be impaired?

Question: Nick Holmes - Societe Generale - Analyst : Okay. That's great. Thanks very much.

Question: Farquhar Murray - Autonomous Research - Analyst : Morning gentlemen. Just two questions if I may. Firstly, on the assumption change impact, it's obviously very clear that we are looking at EUR20m to EUR25m pre-tax per quarter on the underlying earnings. But when you say the impact on cash generation is the same magnitude do you mean EUR20m to EUR25m per quarter post-tax on cash? And why would the pre-tax figure on earnings and the post-tax figure on cash be the same? That's just what I'm trying to understand that. And also obviously that would seem to imply the US cash guidance is now possibly falling below $1b per annum. Is that right? And then secondly on the S&P surplus position, I think you had previously stated that this was running at the upper of the target range because of the flattering impact from low interest rates which could obviously reverse quickly if rates rose. Has that changed particularly? Thanks.

Question: Farquhar Murray - Autonomous Research - Analyst : No, just on that second question, the second question was that I think previously you'd stated you were running at the upper end of that S&P surplus range because interest rates were very low and if they rose it could potentially reverse that. And has that changed particularly?

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

Question: Farquhar Murray - Autonomous Research - Analyst : Yes.

Question: Steven Haywood - HSBC - Analyst : Good morning everyone. I just wanted to follow up on a couple of questions that were asked earlier. Just to double-check that how many recurring charges have you now got in your underlying result, because you announced the EUR20m negative one per quarter last year and you've got the EUR20m to EUR25m this year. Is that all of the recurring charges that we have going through the underlying result? And do you think or is there any chance or possibility that these can be reversed in the future? And then on model updates can you just give us an idea of how many are left to do? And do you have a process or a plan to implement a model review process going forwards on an ongoing basis or do you know how many years it will be until your next model update process? Thank you.

Question: Steven Haywood - HSBC - Analyst : Yes, just following up on the first bit, is there any chance of the recurring impact being reversed in the earnings?

Question: Steven Haywood - HSBC - Analyst : Okay. I understand. 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. NOVEMBER 12, 2015 / 8:00AM, AEGN.AS - Q3 2015 Aegon NV Earnings Call

Question: Nadine van der Meulen - Morgan Stanley - Analyst : Yes, hi. Good morning. With regard to the senior debt position at the holdco level, that will mature in the next couple of years. How are you thinking about refinancing that by hybrids? I appreciate it won't make much difference on the entity levels, but I'm just trying to get an idea on how significant this could be optically on the Group Solvency II range of 140% to 170% that you indicated at the first half? Thank you.

Question: Nadine van der Meulen - Morgan Stanley - Analyst : Thank you. Very clear.