Aegon NV Q4 2016 Earnings Call Transcript

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

Question: Ashik Musaddi - JPMorgan - Analyst : Hi, good morning, Alex. I have three questions. First of all, can you give us some clarity about your interest rate sensitivity, especially in the US? Somehow it shows that the rising interest rate is negative and falling interest rate is negative as well, so what are we missing here? Because if I think about it economically, a rising interest rate is fascinating news for the life business in the US. So what are we missing here? Any thoughts on a more economic basis rather than just headline solvency basis? Second thing is, can you give us a bit more clarity on Dutch capital position? Because it looks like there has been a drop over first half numbers and there's still uncertainty around LAC DT. How should we think about the dividend upstreaming from Netherlands? You flagged about EUR100 million but how should we get comfortable with that? And thirdly is, are you continuing to remain confident that even if you don't get any dividend from Netherlands and from UK, your dividend is still covered going forward as well, dividend and hold co cost? That would be great if I can get clarity on these three ones. 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 17, 2017 / 8:00AM, AEGN.AS - Q4 2016 Aegon NV Earnings Call

Question: Ashik Musaddi - JPMorgan - Analyst : Okay. That's very clear. Thank you. Thanks, Alex.

Question: Albert Ploegh - ING - Analyst : Yes, good morning all. Two questions from my side. I would like to go a little bit into the US earnings, and especially what has been flagged as the one-time items. This quarter clearly there was quite a positive experience in the long-term care, which of course was an issue last year and a review took place in Q3. You do flag the word seasonal in there, so how should we consider this EUR34 million positive in the first quarter -- sorry, in Q4, and how to look at that in terms of the run rate going forward on that specific business line? At the same time, you mentioned also the adverse persistency on the universal life policies. Can we have a little bit of color there and how comfortable are you with that experience going into 2017? Thank you.

Question: Albert Ploegh - ING - Analyst : And maybe one small follow-up more from a cash flow perspective. You mentioned UK Part 7 transfers. What can we expect a little bit in terms of timing? Will that be then more let's say a Q2 event, so more news in August, or is it more an end of year kind of event and what's the -- let's say can you give a little bit of feeling on the kind of size and how we should link that to the regulator in terms of approvals of that? Thank you.

Question: Albert Ploegh - ING - Analyst : Thank you.

Question: Darshan Mistry - Citigroup - Analyst : Morning. Two questions please. Firstly on the Solvency II sensitivities within the UK, could you provide some color as to why the sensitivities for the UK business have increased significantly versus 2Q? And could it be that once your Part 7s are in fact completed in the UK, could the sensitivities normalize or drop again? That's with reference to interest rate sensitivities and credit spread sensitivities. Secondly, on the Dutch Solvency II ratio, you seem to have taken quite a big hit versus the -- where you would have been on a roll-forward basis, but your interest rate sensitivities don't seem to have decreased materially. So could you please again provide a bit more color as to what's going on within the Netherlands? Thank you.

Question: Darshan Mistry - Citigroup - Analyst : Perfect. Thank you.

Question: Farooq Hanif - Credit Suisse - Analyst : Thank you. Hi everybody. I just want to come back on this inflation expectation. Is this related to wage increases on the defined benefit book? I just wondered if you could clarify that? And secondly, in the US, if we do get a delay to the DoL regulatory changes -- I'd be interested in your view on that anyway -- but if we do get a delay, isn't there an issue that you've updated your product suite and actually you might have to revert to some previous product suite or change the way that you price your VAs or deliver them to adapt? How readied are you for the two potential outcomes of DoL or no DoL? If you could answer that, that would be really helpful. Thanks.

Question: Farooq Hanif - Credit Suisse - Analyst : So in terms of just -- if I may just follow up on that. Sales have been weak in the market. Do you think there's still going to be a period of uncertainty on sales? When do you think you can rebound? And what part do higher yields play? I know that these products have been derisked but what part does that play on demand and ability to give more attractive guarantees? 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 17, 2017 / 8:00AM, AEGN.AS - Q4 2016 Aegon NV Earnings Call

Question: Farooq Hanif - Credit Suisse - Analyst : Okay, thank you very much.

Question: Arjan van Veen - UBS - Analyst : Thank you. I have a couple of questions on just dividend upstreaming and the cash position of the HoldCo. Firstly, on Netherlands, the solvency ratio is 141%. You kindly gave us sensitivities to any LAC DT changes. One of your peers yesterday said that their solvency position today is down from year end, from -- due to mainly solvency spread changes and obviously, the sensitivity for them is quite high. You don't specifically disclose it. So the question really is, you have a target of [225] from Netherlands. You didn't upstream that in 2016. I note that the EUR100 million you put in the HoldCo. But given where we're at, at this point now, could you give some view as to whether you think Netherlands upstreaming in 2017 is likely -- and I'm a bit -- personally I would think it's better to rebuild the solvency and then pay out dividends. So I would actually just would suggest actually not paying dividends for a while until you get to a very comfortable situation. And then the second question is more then, when we look at the whole capital upstreaming, from the Company as a whole. So US, your target is EUR900 million, which is paying out based on sensitivities you gave at the solvency -- sorry, at your investor day in December, and the US is paying out effectively 100%. Your dividend currently is EUR530 million plus EUR300 million corporate costs, so you're basically -- your US upstreaming is covering your dividend and corporate costs. So the question really is then, when we look at the cash, that corporate offer is EUR1.5 billion but you raised EUR500 million of debt on December 9, and that rolls away again middle of the year, because it's been issued to replace some debt that you already have. So that drops back down to EUR1 billion. So really just curious around, your target's EUR1 billion to EUR1.5 billion, you're at the bottom of that if you take out that debt. Where -- I note your comments you made around the UK, so really just curious as to what you see the dividend upstreaming capacity is, or upside to what you've said previously around some of the other divisions like asset management in Europe and whether age is still going to be a negative drag as per your guidance? 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 17, 2017 / 8:00AM, AEGN.AS - Q4 2016 Aegon NV Earnings Call

Question: Arjan van Veen - UBS - Analyst : Thanks, Alex. That's very helpful.

Question: Farquhar Murray - Autonomous Research - Analyst : Morning, gentlemen. Just two questions, if I may, all focused on the LAC DT guidance discussion. Firstly, please could you just work through which elements of the guidance you regard as new, and what will be the process to reaching certainty around the implications of this? As you say, we seem to be given about six months to do this. And then secondly, Aegon seems to be making much more cautious comments on this LAC DT guidance than a peer did yesterday. Does that reflect indications from the DNB on your approach, or is it just a more prudent approach to what's presumably a relatively complicated calculation and process? 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. FEBRUARY 17, 2017 / 8:00AM, AEGN.AS - Q4 2016 Aegon NV Earnings Call

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

Question: Nadine van der Meulen - Morgan Stanley - Analyst : Yes, good morning. Thanks for taking my questions. On the -- sorry, another question on LAC DT. You mentioned if it's -- if the cycle drops from 75% to 25% that it would have an impact, I think, on the Netherlands solvency ratio of 8 percentage points. So that would, on the current basis, bring the solvency down to around 133%. I was wondering if you could remind us of the capital generation in the Netherlands? Previously you've guided on that. I'm not sure if that has changed. So we can have an idea of how long, potentially, it would take to get to a certain level, comfortable enough to upstream again. And previously, when you didn't upstream cash from the Netherlands, and the moment you started doing that again was when the level was -- the Solvency II level was above 150%. Just wondering if you could comment on that? Whether that was the sort of level that you'd need or between 140% and 150%, for you to be comfortable? That's the first question. The second question is with regard to the net dividends received from the units, at the nine-month level you had received from the units EUR700 million, and that has now jumped up to EUR1.1 billion. That jump up, so in Q4 is a bit bigger than what I expected, especially because the Netherlands is zero. Would you mind giving the split for the regions and comment on the sustainability of each of the regions? That would be super helpful. Yes, I suppose lastly on the yields, so, if you look at the reinvestment yields versus the back-book yields, could you give us an update on where you are there? Because in the past you've guided that if yields would remain where they were in year one, there would be a negative EUR40 million impact, year two EUR60 million and year three EUR100 million. Perhaps you can update us on that guidance? 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 17, 2017 / 8:00AM, AEGN.AS - Q4 2016 Aegon NV Earnings Call Thank you very much.

Question: Nadine van der Meulen - Morgan Stanley - Analyst : I completely -- sorry. I completely appreciate that, and so probably maybe -- to push on this one, but would you mind giving at least an indication of what the solvency range would be in the Netherlands that you would be comfortable with compared to upstream?

Question: Nadine van der Meulen - Morgan Stanley - Analyst : I'm sorry.

Question: Nadine van der Meulen - Morgan Stanley - Analyst : Yes.

Question: Nadine van der Meulen - Morgan Stanley - Analyst : Yes. I mean, even on the EUR1.1 billion, cash upstream for the full year, could you give a split of that? Of the different regions?

Question: Nadine van der Meulen - Morgan Stanley - Analyst : Yes, of course.

Question: Nadine van der Meulen - Morgan Stanley - Analyst : All right. Thanks.

Question: Nick Holmes - Societe Generale - Analyst : Hi, everyone. Hi there. Thank you. Two quick questions. The first is, Alex, can you give us a bit more color on your plans for the US run-off book? I think you said you're looking at pay-out annuities BOLI COLI. I just wondered what the latest was there? Then secondly, coming back on the DoL. I remember at the investor day you were talking about fixed index annuities and the opportunities for you with that product. Wondered, is that something you're getting into at the moment? Thank you very much.

Question: Nick Holmes - Societe Generale - Analyst : That's great.

Question: Nick Holmes - Societe Generale - Analyst : Yes, that's great, Alex. Thank you very much. Very interesting and very clear. Thank you.

Question: Bart Horsten - Kempen & Co - Analyst : Yes. Good morning. I will try to ask a few questions also on LAC DT, which have not been asked so far. First of all, you said that you upstreamed EUR100 million from your operating entities to the HoldCo in the Netherlands. Does that mean that you -- that these entities are well-capitalized enough, or don't you need approval for that from the DNB? And secondly, just to understand, you made more or less the upstream of dividends to the holding conditional on the review. Does that mean that if the 75% stays intact that you will upstream the EUR100 million, or are there still other conditions? And even if it would be lowered to below 75%, would you still be able to upstream dividends? My second question relates to the margin development in the US. I see quarter-on-quarter an improvement of your margins in retirement plans, variable annuities and mutual funds. Is it fair to assume that these improvements, or these relatively higher levels will continue into full year 2017 and beyond? And my final question, if I may, relates to the question earlier asked by Nadine on the reinvestment yield. Could you indicate at what level of US treasury yields you would be at breakeven on the reinvestment yield versus your back-book yield? Thank you.

Question: Bart Horsten - Kempen & Co - Analyst : Yes, I know that, but could you flag what do you need in terms of rate movements in the US to get to that same level? Would that be a 50-basis point increase in the treasury yields?

Question: Bart Horsten - Kempen & Co - Analyst : Okay.

Question: Bart Horsten - Kempen & Co - Analyst : Okay. Good to hear, thank you.

Question: Andy Hughes - Macquarie Group - Analyst : Hi. Thanks so much. A couple of questions on the Netherlands, if we could, and one on the Group cash flow. So on the Netherlands, the inflation assumption has changed. Could you clarify what it's gone from to? I'm just looking at the January movement in the OP yield curve, it's moved quite a lot. It's gone up by 23 basis points over January. I'm just wondering, how does that change things? Because presumably, if you don't own much Dutch government bonds then actually, it should be reasonably positive, given where -- what's happened to the spreads on Dutch mortgages, relative to the OP yield curve. And an extreme example, if the LAC DT credit was zero, now, you'd obviously drop below the [130] you've guided to for the Netherlands, but is that the end of the world? I mean, you've got a big solvency buffer at the holding Company. You're raising senior debt at 1%. It doesn't sound like even if it dropped to zero you would take any action on the Group dividend. So maybe if you could just clarify that point to -- based on where we are today? And the final question is on the cash flow bit. So everything sounds better. Cash flow and cost savings coming through. Fee income better. Expense savings. And even a small profit on long-term care morbidity assumptions. And obviously, the cash flow guidance is staying the same. But surely all these items are positive and should come through in the cash flow over the year. So are you ahead of plan, based on this quarter's results on your cash flow guidance, please? Thank you.

Question: Andy Hughes - Macquarie Group - Analyst : I mean, just clarifying, what is the inflation assumption that was coming from to? Are you able to say what you're assuming now in inflation in the Netherlands?

Question: Andy Hughes - Macquarie Group - Analyst : And it's an active assumption? So if the Dutch implied inflation rate changes then that automatically changes in your assumptions? Or is it something you set periodically?

Question: Andy Hughes - Macquarie Group - Analyst : Great. Thanks very much.

Question: Gordon Aitken - RBC Capital Markets - Analyst : Yes. Morning, thanks. A couple of questions please. One on UK and Cofunds. I mean, you closed this acquisition just on January 1, but you announced it some time ago, back in August. Just wondering what your experience has been since you bought it, or since you announced it, in terms of flows? I mean, you bought that DC book from Mercer in the US. I know Mercer was an institutional book and this is retail, but should we expect a period of transition where some business does leave? And just related to that, you've talked about a technology upgrade here and advisors have been quite vocal about the fact they hope that you spend more money on the platform compared to the previous owner. Just wondering what the cost of any upgrade would be? And the second question is on the US business and variable annuities and the impact of DoL. You've talked about the impact on the gross flow, and -- but if we look at the movement in the net -- or the net-net outflow and compare that to the movement in the gross flow, it's clear that the level of gross outflows have also increased. Is DoL having an impact on the in-force book, as well as having an impact on sales? Thank you.

Question: Gordon Aitken - RBC Capital Markets - Analyst : Thank you. Yes, 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. FEBRUARY 17, 2017 / 8:00AM, AEGN.AS - Q4 2016 Aegon NV Earnings Call

Question: Steven Haywood - HSBC - Analyst : Good morning. Thank you, Alex. You mentioned the EUR500 million of capital that's freed up in the UK. Could you say to us what proportion or what is available to shareholders, to be upstreamed from the UK business here? And then on the implementation of the fiduciary rules, have they actually been delayed, or are they still being part implemented from April 2017? And obviously, on January 1? Or is the review going alongside the implementation stage? Any update there will be quite helpful, thanks.

Question: Steven Haywood - HSBC - Analyst : Okay. That's very helpful. Thank you.