Aegon NV Q4 2015 Earnings Call Transcript

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

Question: Nadine van der Meulen - Morgan Stanley - Analyst : Yes. Good morning. Thank you for taking my questions. I was wondering to what extent the recent market turmoil has impacted capital positions in the three main entities. So if you could give an update of where we are now instead of year end, so both in the US, the Netherlands and the UK. And particularly I'm interested in the US as, with the RBC ratio, assets are not mark-to-market. So I was wondering if you expect charges there from rating migration and cash flow testing like you, for example, saw in 2001 and 2008. So that's my first question. The second question is whether you can comment on the progress of the sale of the UK annuity business or the planned sale of the UK annuity business. And lastly, why did you take a morbidity charge in the US? I'm just curious because I haven't really seen this with peers. Wondering if you can talk us through what is behind this, if this is a one-off or if there's a trend behind this. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 19, 2016 / 8:00AM, AEGN.AS - Q4 2015 Aegon NV Earnings Call And then perhaps maybe final question, do you have a target for operational free cash flow? You had a target before. I didn't see it recently. And in that light also the dividend was around 50% payout ratio free cash in 2015, whether this is the payout policy and level we should expect going forward. Thank you very much.

Question: Nadine van der Meulen - Morgan Stanley - Analyst : And with regard to the dividend?

Question: Nadine van der Meulen - Morgan Stanley - Analyst : But is that, can we take that as somewhat of a policy going forward? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 19, 2016 / 8:00AM, AEGN.AS - Q4 2015 Aegon NV Earnings Call

Question: Nadine van der Meulen - Morgan Stanley - Analyst : Thank you very much.

Question: Farooq Hanif - Citigroup - Analyst : Hi there. Good morning everybody. I just want to go back to your confidence on impairments. So is that -- looking at your portfolio and looking at what's happened to spreads in below investment grade and even BBB in the US, is your confidence coming through because essentially the market value of the bonds is still very high because the underlying yield is low? Can you explain the confidence, because when you look at commentary in the market from banks and from participants, clearly there's a big worry about it? So are we missing something or is this a time delay? If you could just comment on that. Secondly, I notice in the US business with Mercer, you had a bit of a dip in your margin. Sorry, not in the US, I mean the retirement businesses generally you had a dip in margin in Q4. Is this related to Mercer? When will we start seeing the positive benefits from an earnings point of view of the Mercer deal? And I guess lastly, can you give us an update on LAC DT in the Netherlands? Thanks.

Question: Farooq Hanif - Citigroup - Analyst : May I just quickly come back on Solvency II, if I may? One of your peers in the Netherlands talked about shifting down from a 75% potential LAC DT pool to 50%. Are you at the 75% level?

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

Question: Farquhar Murray - Autonomous - Analyst : Morning gentlemen. Just two questions, if I may. Firstly on the cash generation figure of EUR377m in the quarter, that looks really quite strong, and I think it would run rate to above the EUR1.3b guidance you've given for full year 2016 at the investor day. I just wondered if you could help, REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 19, 2016 / 8:00AM, AEGN.AS - Q4 2015 Aegon NV Earnings Call just help us square this quarter to that guidance. In particular the new business strain looks quite low in the quarter and I just wondered what's driving that and whether we should extrapolate it. And then secondly, just coming back to Farooq's question, a little bit around the LAC DT assumptions, I take on board what you're saying, which is that this is going to be very, very potentially company-specific. I just wondered what would be specific particularly to Aegon in terms of the way you would look at the LAC DT outcome. And if you could maybe just give us a bit of a sense of how the mechanics work around the recovery that you can get on that figure. Thanks.

Question: Farquhar Murray - Autonomous - Analyst : Okay. But just to follow up, you're saying, okay, one company may come out with, say, 50% recovery. And you're saying, look, actually, there genuinely could be quite a substantial range around that. It could be 75% or 25% for anybody else.

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

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

Question: Mark Cathcart - Jefferies - Analyst : Hi. It's Mark Cathcart from Jefferies. I'd just like to put to you a hypothesis that the following happens and I'm curious to know what's more important to you. Your observation of the 50% cash payout ratio or your EUR1.7b of dividends albeit supported by EUR600m. So the hypothesis is that the dollar goes down another 10%; it's fallen 5% in recent weeks. Yields in the US hover around 1% to 1.5%; they're currently at 1.7%. And also, as implied by current spreads in the market, you get losses coming through say on a two-year horizon, which are significantly above that 20 basis points that you've assumed. And if I can venture to say this, that there are some more morbidity and mortality upsets. Then I'd like to ask Darryl, what's more important, the 50% payout ratio observation or the sticking to the EUR1.7b of dividends on the assumption that that EUR600m, on what I think is not a ludicrous scenario, is gobbled up quite quickly? Your cash earnings have been significantly bailed out by the dollar over the past three years. I'm just wondering -- there's a vulnerability there. So what happens to your dividend policy on that scenario which is not that unforeseen?

Question: Mark Cathcart - Jefferies - Analyst : (Technical difficulty) that imaginary. Can you just remind us what your 10-year yield assumption is, please, so over the next, say, three years? And also the assumptions you make on some of your alternative investments and how that might deviate cash earnings? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 19, 2016 / 8:00AM, AEGN.AS - Q4 2015 Aegon NV Earnings Call

Question: Mark Cathcart - Jefferies - Analyst : And what about alternative investments?

Question: Mark Cathcart - Jefferies - Analyst : Okay. Thank you very much, Darryl. Thank you.

Question: Nick Holmes - Societe Generale - Analyst : Hello. Hi there. Thank you very much. Two questions. Firstly, just coming back on your guidance on impairments, I wonder if you could talk us through a bit more your process. And what I mean by this is you've got the unrealized losses, when do those unrealized losses become impairments. Do you have a rule that say, a 20% fall in market value becomes an impairment or is it your own analysis or maybe credit rating migration? And then the second question is on the Department of Labor proposal. Wondered if you could just give us an update on where you think that's going in terms of impact. And also timing, when you think this will start to affect your business.

Question: Nick Holmes - Societe Generale - Analyst : Yes.

Question: Nick Holmes - Societe Generale - Analyst : Just two very quick follow-ups. Firstly, Alex, do you think it will, the DOL will affect sales practices this year? And I'm thinking could there actually be an increase in sales as advisors want to get them done before the rules change? And then just second, very quick follow-up, Darryl, you've said I think in the past that you don't expect default this year in the energy book. Is that still your view?

Question: Nick Holmes - Societe Generale - Analyst : Sorry Darryl. Let me just correct. When I said defaults, not impairments, I meant actual companies defaulting. I mean obviously, as you've guided, you will have impairments which anticipate possible default. But I think you said, or maybe it was another member of management, that there wasn't a likelihood of actual companies defaulting this year.

Question: Nick Holmes - Societe Generale - Analyst : Yes. That's very clear. Thank you very much.

Question: William Elderkin - Goldman Sachs - Analyst : Thank you. Good morning everybody. One question or one clarification, then a couple of questions on the UK business. Just a clarification, the guided or target level of capital generation that you've given going forward, am I correct in thinking that that number is effectively net of an

Question: William Elderkin - Goldman Sachs - Analyst : Can I just follow up on that, the last part, the revenue margins? The movement I'm really trying to understand is how much further compression can we expect, if you like, in the margin on the legacy portfolio. And then secondly, I still don't have a good feel of the extent to which commission expenses particularly will fall away again on the legacy portfolio and I was just wondering if you can help me with that.

Question: William Elderkin - Goldman Sachs - Analyst : Okay. I'll follow up afterwards. But thank you.

Question: William Hawkins - KBW - Analyst : Hello. Thank you very much. All in the Americas. Darryl, can you just explain a little bit more clearly, with the assumption change in variable annuities and the loss recognition charge in fixed annuities? I just don't really understand what you've done there. And can you just repeat and explain why you think the long-term care charge in the fourth quarter is so clearly a one-off? You said something in your passing remarks but I didn't quite follow that. And to the extent that no news is good news, very little reference to mortality in the US this quarter. To what extent do you think, post your assumption changes, we're genuinely seeing some good news on the mortality front or is it too early to call that at the moment, just given that the fourth quarter seasonally is normally quite a good one anyway? Thanks.

Question: William Hawkins - KBW - Analyst : Thanks.

Question: Benoit Petrarque - Kepler Cheuvreux - Analyst : Hi. Yes. Good morning. It's Benoit Petrarque from Kepler Cheuvreux. The first question will be on the operating free cash flow. I was wondering if you could give us the figure on the Solvency II framework, whether that's basically -- whether that was consistent with the EUR1.3b you've mentioned in Jan. And then to come back on the slide 20, I was wondering if you could give us an update on this oil exposure. What is the amount of unrealized loss at the end of, let's say, in February? Just give us an update there. And will you expect downgrades during the year or have you seen already downgrades on this sector? And I was wondering are you afraid it could translate into a potential drag on cash flows in 2016? Thank you.

Question: Benoit Petrarque - Kepler Cheuvreux - 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. FEBRUARY 19, 2016 / 8:00AM, AEGN.AS - Q4 2015 Aegon NV Earnings Call

Question: Steven Haywood - HSBC - Analyst : Good morning gentlemen. It was just on, following on from you saying that in the UK you really need to build scale here and that's what's going to drive earnings going forwards, I was wondering how open you are to acquiring scale in the UK, whether from bolt-on acquisitions or acquiring further assets under management or platforms etc. How do you feel about any of this?

Question: Steven Haywood - HSBC - Analyst : Excellent. Thank you very much.