Aegon Ltd. (AGN) Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for joining us today. Welcome to the ASR Conference Call on the announced transaction earlier this morning. On the call with me today are Jos Baeten, our CEO; and Ewout Hollegien, our CFO. And they will discuss the compelling rationale of the transaction and the financial merits that we have disclosed this morning. Now Jos will kick off, and then Ewout will follow-up on that later. And after this session and the short presentation, we'll have ample time for Q&A, but the total session will last about 45 minutes. As usual, please do review the disclaimer that we have in the back of the presentation for any forward-looking statements. Now having said that, Jos, the floor is yours.

Thank you, Michel, and good morning, everybody. I'm sure you have seen our announcement of this morning. I will keep my remarks short to allow maximum time for questions. Clearly, today for us is a very important day. We're excited to announce that Aegon and -- sorry, that's ASR and Aegon are now 2 renowned Dutch companies and deeply rooted in that society will combine their businesses to create a strong and sustainable leading insurer in the Netherlands. And let's move to Slide 2. This compelling in-market consolidation is strategically a fantastic move for ASR that I can summarize in 5 main points. First of all, it materially strengthens the position of our joint businesses. Secondly, it creates an even stronger foundation for long-term sustainable growth from which all of our stakeholders will benefit. Thirdly, the transaction offers substantial synergies and a return well above our hurdle rates, while maintaining a robust balance sheet. Fourth, the presence of a PIM at Aegon will help to accelerate the implementation across the businesses in the coming years. And finally, we are highly confident in the speed and implementation of the integration based on our extensive experience. So let's take a look at the financial metrics at the next slide, Slide 3. The transaction is about a total consideration of EUR 4.9 billion, comprising EUR 2.5 billion cash consideration and 29.99% equity stake which is based on the close of yesterday, representing a value of EUR 2.4 billion. The capital investment amounts roughly to EUR 4.3 billion, which takes into account the capital benefit from the life synergies. Excluding leverage, this delivers an above 14% ROI, largely above the M&A hurdle rate of 12%. Please note that we get the Aegon NL business without any debt on their balance sheet. We believe we can deliver on the integration plan, which in turn means roughly EUR 185 million run rate cost synergies, a number we expect to achieve 3 years after close of the transaction. The OCC uplift will be around EUR 600 million, unlevered and including the synergies. So quite compelling numbers we believe. And as a signal of confidence in the merits of the transaction, we will offer shareholders a dividend step-up of 12% to EUR 2.70 per share for full year 2022 and will commit to a higher progressive dividend growth of mid- to high single-digits per annum until 2025. This is an uplift of the earlier announced low- to mid-single-digit growth, as you may remember. As part of our stated policy in case of larger M&A, our share buyback program is halted. Let's move to Slide 4. And let's talk a little bit about the business rationale of this transaction, which is clearly strengthening our strategic positioning across all pillars. It delivers on all the key actions of our existing strategy, which we presented in the investor update in December last year. Highlighted here on this slide are some topics where this transaction has the greatest impact. First of all, in pensions, in particularly Pension DC, this transaction offers skills and growth opportunity where we combined are the #2 player in the market due to the pension reform that a market that due to the pension reform will move further in that direction. Integrating large life service books obviously drive a large part of the significant cost synergies we can achieve. As we have integrated various admins in the past years, we have high confidence we will deliver on this successfully. Of course, the transaction is also beneficial for our existing Non-life business, adding scale on a very efficient platform. So let's now have a look on Slide 5, how the combination looks. Both in Life, as in Non-life, we improve our market positions. And the transaction reinforces our overall #2 position in the consolidated Dutch market with almost 25% market share, excluding health. Where the #1 has around 28%, the #3, 17%; and the #4 8%, confirming our market-leading position in the Dutch insurance space. The pie charts on the top show that we grow almost EUR 2 billion in premiums and achieve a more balance between Life and Non-life. The pie chart in the bottom half are actually quite interesting. As you can see, the compensation of the operating result does not change all that much. We really understand the dynamics of the sources of income. Our businesses have been generating very predictable results. And frankly, with the addition of the Aegon NL business, we believe, we can maintain to be in such position with high visibility on the results. On Slide 6, some further insights. Here we show the highlights of the compelling rationale on a business line level. For the sake of time, I will not mention all. In Non-life, it reinforces our #1 position in disability and our strong #3 position in P&C. It enhances profitability of the total portfolio through our underwriting skills, cost discipline and scale benefits. In our fee-based business, we are in a new combination market leader in IORP and Pension DC, which is underpinned by scale and skills. We can leverage Aegon's strong brand in pensions and mortgages, where we can benefit from Aegon's distinct mortgage sourcing and funding capabilities. In addition, Robidus and Nedasco complements our existing D&S capabilities and increased capital-light fee income. And finally, in our service books, we can capture significant synergies as well. We will rationalize and migrate service books, Individual Life and Pension DB to our proven and most efficient servicing platform, and we will leverage the operational excellence of TKP in the Pension DB area. So let's have a look at the cost synergies on Slide 7. This slide shows an indication of the sources and timing in cost synergies. I should point out that the charts are just for illustrative purposes. We expect the synergies to arise from integrating, operational and support activities, mainly from scale in Life and Non-life and mortgages. The target operating model will be making use of the operations of both ASR and Aegon. The run rate cost synergy is EUR 185 million per annum, pre-tax and net of restructuring costs are expected to materialize 3 years after closing. So we can grow into that number over time as we integrate the businesses. Certain star trances are expected to be integrated within the first year after closing. The Non-life integration is expected to be completed within 2 years of closing and the majority of synergies from individual Life, Pension DB and mortgages are expected to be realized 3 years after closing. So I now will hand over to Ewout for some detail on OCC return on invested capital and, of course, the strength of the balance sheet.

Yes. Thank you, Jos. So let me start with the OCC, the capital investment and the ROI. On the top of this slide, so Slide 8, we show how the OCC will grow from this transaction. And in the lower half, we show the invested capital. And now we have based our calculations on our run rate OCC 3 years after closing. So Aegon NL stand-alone comes in at a run rate of EUR 530 million. The number is underpinned by our own business plan on Aegon NL and our OCC methodology to make it like-for-like. There's no re-risking included. Cost synergies in OCC are around EUR 70 million. But please note that this covers all synergies, excluding the Life synergies, which are capitalized in the Solvency II ratio. So the stand-alone plus synergies brings us to a EUR 600 million on an unlevered basis. Now on the invested capital. Firstly, the consideration of equity and cash, totaling approximately EUR 4.9 billion. We deducted the capitalized cost synergies from the Life book and included some capital synergies, which are offset by restructuring expenses. This gets us to a fungible capital investments on an unlevered basis of about EUR 4.3 billion. By the way, if our share price yesterday would have closed EUR 0.02 lower, the number would have been EUR 4.2 billion, so it's definitely a round number. If we assume parts of funding comes from Solvency II compliance instruments, this will bring down the capital investment further, where the unlevered ROI is above 14%, the leverage ROI will exceed 20%. So very attractive and exceeding hurdle rates. If you are more a traditional investor that does not capitalize the cost synergies, the OCC would go up with approximately EUR 70 million, and the unlevered ROI will still be around 14%. And please note, ROIs excluding the capital relief that the PIM will or might bring in the coming years after introducing this on ASR's portfolio. Let's turn to Slide 9. On the left, we show that the pro forma OCC run rate is expected to amount to approximately EUR 1.3 billion. As mentioned, Aegon NL contributes approx EUR 600 million after synergies and the EUR 1.3 billion also includes financing expenses where the overall expenses will, of course, be dependent on the mix of equity incidents. But in any financing mix, this will leave us with about double-digit OCC this year again. Due to this deal, we will hold the buyback program. Having said that, given the additional capital that we generate, we feel comfortable to show considerable increase in dividends. And the dividend per share that we announced today will more than offset the SBB program. To shortly talk you through step up immediately of 12% this [indiscernible], and we will continue with the progressive dividend going forward, but at a higher rate than before, so mid- to high single-digits until 2025. The dividends preferred will be independent from the potential usage of our mandate to issue share up to 10% of our current outstanding shares. So all in all, an in-market consolidation, the yields return over and above our hurdle rates and delivers double-digit increases in dividend to shareholder. And the presence of the PIM in Aegon NL will help us to accelerate the implementation of it across the Asia business in the coming years in the direct way for growth. Let's move to Slide 10. This slide shows strong pro forma Solvency II benefit, given that we acquired a debt-free balance sheet, these metrics show that financing through debt is very feasible. On a combined basis, before financing, the pro forma unrestricted Tier 1 would amount to around EUR 9 billion, providers for Solvency II headroom of approximately EUR 1.6 billion in both RT1 and Tier 2 and Tier 3 combined, so -- and both financial flexibility. Risk financing is in place and financing leverage to remain well within the limits and below the 35% we have as an internal soft limit. Jos and myself has spoken to S&P before the announcement of this transaction. And we are confident that our rating and the stable outlook will be maintained after this announcement. Let's turn to Slide 11 for pro forma Solvency II ratio development. Based on the half year 2022 figures, the pro forma Solvency II ratio is expected to remain strong at a level north of 190%. The number includes harmonization of assumption in -- provision with that of ASR and EUR 500 million cash out from ASR that is due to the transaction. After the synergies and legal mergers of entities have been realized, solvency ratio is expected to increase to above 200%. Given that the balance sheet almost doubles in size, I'm really happy to see this transaction underpins our robust and sustainable capital position. In this number, we assume continuation of Aegon Life partial internal model, which will be an accelerator for the implementation of the PIM of our combined businesses. And the move to partial internal model for ASR is expected to take place increased debt, as mentioned on the slide and, of course, subject to regulatory approval. My expectation is, however, that the implementation will take place between 2 to 4 years. This will provide room in our capital position that we can deploy for further possible growth. And before I will hand over to Jos, I would like to say something, because I know Jos will not mention it himself. I hope that I can address, of course, after the AGM of 2024. But he committed himself to lead and oversee the integration, and his term will be extended to the AGM of 2026. So congratulations on this Jos, and now, back to you.

Thank you, Ewout. Well, ladies and gentlemen, so far, we have seen a lot of important slides on the strategic rationale and the transaction and its financial accretion. But actually, this is the slide that shows what we will be working on for the next 3 years. Let's make no mistake. This is a large transaction, we're fully aware of that, and we need to do this right. Given our strong records and experience from past acquisitions in system rationalization, I am confident that we will make this work. As you can see in the indicative time lines on the upper right part of the slide, we have identified for each business line, what needs to be done and when we expect to do it. Where the majority of business lines integrated within 2 years after closing. For some books, the integration does not start immediately. Let me give you one example. For Individual Life, the integration does not take 3 years, that we will start with integrating this after we have successfully adopted the Life PIM to maximize return. The integration plan is key to realize the EUR 185 million of run rate cost synergies we mentioned earlier. This will be the center of our focus for the coming 3 years. In a combined company that will have over 6,500 employees and more than 6.5 million of customers. So let's turn to Slide 13 for the transaction terms. I don't think I need to go through it in the benefit of time. Let's wrap up. This compelling end market consolidation is strategically a fantastic move from ASR that materially strengthens our position of our joint businesses. It creates an even stronger foundation for long-term sustainable growth from which all of our stakeholders will benefit. Transaction offers substantial synergies and a return well above hurdle rates, while maintaining, as already mentioned by Ewout, a very robust balance sheet, which can be further optimized through the acceleration -- accelerated adoption of PIM in the coming years. And finally, we are highly confident in the speed and implementation of the integration based on our extensive experience. So having that said, let's go into Q&A, if there are any remaining questions.

Yes. And can I have a small favor to ask, if you could limit the number of questions to 2, because of the limited time we have left for this call, it gives everybody an opportunity to at least ask 2 questions. If there is time over, we can do another round. So please limit it to 2. Thank you.

[Operator Instructions] Your first question comes from the line of Cor Kluis from ABN AMRO - ODDO BHF.

It's Cor Kluis from ABN AMRO - ODDO BHF. Congratulations, you've done it. So it's very, very pleasure that you've reached this deal. So congrats. Yes, a few questions. First of all, on the timing on the PIM, you mentioned 2 to 4 years. Could you give a little bit more clarity on -- have you already discussed this? To what extent you have discussed it with the Central Bank? Is that easy? Has ASR already prepared itself for partial PIM for certain partial. Somewhat more granularity on that part. And the other part is the synergies, it looks a little bit conservative, EUR 185 million in synergies, and on that slide, you gave, I think, little bit composition of the synergies 1/3 of Life, they want to normalize on the fee business, and you say it's illustrative. But yes, especially the Life part. Could you elaborate a little bit more on the size of the Life synergies, because I would estimate that there should be clearly more and more potential in that line. And the last one is on the bank. You just sold your bank. Now you're acquiring again a bank. What's your view on that? Those are my questions.

Cor, we always thought that you were a brilliant analyst, because you're one of the few people that already elaborated a little bit on this potential combination, but I have to change my view because you asked 3 questions and the limit was 2. So let's start with the second one on synergies. You should be aware that this is a transaction that we have prepared with Aegon Group, and to perform that, that's our early leaks, we didn't have a lot of conversations already with our new colleagues. So this is based on our view, and I think it's a fair number. It will mean a lot of work, it will be in the fee business, in the pension business, in the mortgage business, in Life individual, of course, a little bit less given the different sizes in Non-life. But exact numbers in terms of split are difficult to give. I think it's wise to have further discussion with our new colleagues. And because you're the only one to preannounce this transaction a couple of years ago. On your third question, yes, we -- as from closing, Knab will be part of ASR Group. We are happy with the brand, we haven't discussed yet with anybody on Knab side on the future. The first thing I think is important to have a view from Knab's management, what's their view going forward. So what that will mean in the future, we will see. And on the PIM, I think Ewout is happy to give his reflection.

Absolutely. So on the timing of the PIM, and so we also put that on the slide, we actually see free phase. So one is that we introduced the PIM for that Aegon Life currently have for our own book that will take probably 2 to 3 years. Thereafter, we will include additional modules to that PIM, for example, a module on mortality because we have an as you know a large winner book, but also on the rural real estate. So that's the second phase. We'll probably take another year. And thereafter, we will also do implement a PIM for the Non-life operations as -- and that will be Phase 3. So all in all, we expect to go through this phase in 2 to 4 years from closing. Having said that, so you had other questions. So one was, has the regulator been involved in this complement about this thinking. So the key tenets of the transaction have been discussed with DNB. And we have a good working relationship with the regulator and have a clear view on what they require from implementing the PIM. You also asked, will that be easy? No, implementation will not be easy. It will require hard work from our teams. But we are confident that we will make it by the end of the day to introduce the PIM. And that's also because of the case, and we have said that in the past is that already in the company, we are running an own model, that's not an internal model, but we are running our own model. So we, in a way, have prepared ourselves for going into a internal model once. But of course, doing a formal application is something differently. But we -- again, we are convinced that the part that we present that we are able to make it.

Your next question comes from the line of Ashik Musaddi.

Yes, and really, congratulations for this deal, the phenomenal one, a pretty big one. So well done. Just a couple of questions I have is, first of all, you gave the number about synergies, as Cor was asking about that as well. But is there any basis you can say on what basis have you given this EUR 185 million as a percentage of the cost base of Aegon? Or is this an industry trend? On what basis, have you arrived at this EUR 185 million and specifically for Life business? Would be good to know that. That's one. And second thing is, if I look at the asset allocation of Aegon's Dutch business and your business, it's very different. Aegon is very, very heavier weight on the Dutch mortgages. So how do you think about asset allocation? Do you foresee any asset allocation changes? And would you say that -- is there more money to be made in your, let's say, thought about asset management or would you say that the current -- all these numbers are based on where we are at the moment or the asset allocation at the moment? I'm sorry, one more, sorry, one more small question. On your financing, you mentioned there is a chance of new shares to be issued. Under what scenario would new shares be required? Sorry, just one more.

First of all, the synergies, the synergies are based on the joint cost base as it is today. So that's our starting point. The cost of Aegon Netherlands, our costs, those 2 added together, and from there, we will reduce the cost over time. And in the first year, we will have a bit more integration costs and they will fade out over time. So in total, the run rate in year 3 after closing, we assume will be EUR 185 million. It's too early to specify this over the different business line, of course, after I said to Cor, we have had the conversation with our new colleagues, then we might come up with more detailed numbers on that. But that's just too early, but we're pretty confident that the EUR 185 million is a realistic number going forward. And then your second question was on asset allocation and the new combination, starting from a higher level of mortgages in the Aegon portfolio. Yes. So it's a good question. So of course, we have looked to the investment portfolio of the Aegon NL business. And in general, we believe it's a very effective investment portfolio. That's why -- and I also mentioned that already is, we didn't include additional OCC coming from re-risking. When we look to the overall portfolio, we do indeed see that we can optimize a bit more, so then compare to our own portfolio. We have a bit more in equities, and we have a bit more in real estate. And that could also be over time a pathway that we can work. But again, we did not include it in the OCC's percentage. And on your last question on the financing, I think read the press release carefully, we will do the financings through a number of -- in a number of ways from our own balance sheet and adding some Solvency II compliant finance instruments, all within the already being in place allowance from our AGM.

Your next question comes from the line of Mr. Andrew Sinclair from Bank of America.

Two for me. Firstly, we just -- and again, congratulations from me on the deal. It's just hugely impressive, well placed. So 2 for me. Firstly was just on the capital synergy benefits, good to know on the timing, but there's quite a lot of detail or decent detail on cost synergy benefits, but not really much in terms of actually the quantification of the capital synergy benefits from moving to the partial internal model. Can you give us any more color around that? And secondly, just to dig a little bit more into the funding cost funding methods for the transaction. I can say that you can issue debt and you said you've left yourself open to issuing equity if you sold the site. But it looks to me like you've got enough headroom that you wouldn't need to issue equity if you want to just fund this with debt. Can you just give any more color there? Would you feel happy to just be doing this with the additions.

Thank you for these questions. So to start with the capital synergies that we expect that comes from the introduction of the partial internal model of the ASR portfolio. Please be aware that it's difficult now to comment on any exact number, because you have to run a decent process and you don't want to now already, as I said, a number on that. Having said that, I think in the market over the past couple of years, we -- there is a lot of stuff being written about the benefit that you will get from introducing the PIM. And when you then divide it by 2, because probably the combination will be twice as big and Aegon NL already has an internal model, I would say that could give a sense of the capital synergies that you get from that. So that's on the capital synergies benefit in the internal model. There are also some capital synergies by combining these businesses. These will be roughly of a number of around EUR 150 million to EUR 200 million. And that exit number is as also the restructuring expenses that we included in the capitalized synergies that we have put on the slide. So that is on the capital synergies case. On the financing mix, I think it's -- I reiterate what you actually have said. And on the other hand, we will look for the optimal balance between equity and debt, maintaining strong balance sheet, ensuring that the dividend per share is attractive, ensuring that OCC share is attractive, and we will balance that in total by determining how we will look -- by determining the financing mix.

Maybe to add one thing. You may have read it and there is already a bridge in place for the financing at closing.

Your next question comes from the line of Farooq Hanif from JPMorgan Chase.

What are your views on the lockup? I mean you must have had conversations with Aegon, what are your views on what their intention is about holding such a big state in you? And secondly, can you talk about revenue synergies quickly? So you're getting a lot more new customers and you're a big much larger Non-life player. So can you talk about revenue synergies as well, please?

Well, on the lockup Farooq, there is a lockup for the first 6 months after closing. We are happy with having a strategic shareholder, especially during the period of the integration. I think it's important that there is a joint interest in doing it right and doing it at the right speed. What Aegon's view is on the stake going further, I think after this call, there is a call with Aegon, and I think it should be a question asking too large. But on the specific question of the lockup, we do have a lockup of 6 months after closing. And from there, it's up to Aegon.

Yes. And maybe, Farooq, on the revenue synergies. So we have been carefully to include any revenue synergies coming from this deal in the numbers that we have just presented to you. All we have some -- yes, we believe that the well strengthened positions in several markets will help us from a revenue basis, but we have not included that in the numbers.