Aegon Ltd. (AGN) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to Aegon's First Quarter 2024 Trading Update Call. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker, Yves Cormier, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining this conference call on our first quarter 2024 trading update. My name is Yves Cormier, Head of Investor Relations. Joining me today are Aegon's CEO, Lard Friese; and CFO, Matt Rider, to take you through our results. After that, we will continue with a Q&A session. But before we start, we would like you to -- we would like to ask you to read our disclaimer on forward-looking statements, which you can find at the back of the presentation. And now I would like to give the floor to Lard.

Yes. Thank you, Yves, and good morning, everyone, and thank you for joining us today. I will start today's presentation by running you through our strategic and commercial developments before handing over to Matt to address our first quarter results in more detail. So let's all move to Slide #2 to review the highlights of the quarter. The beginning of the year was marked by continued commercial momentum in the U.S. and Brazil as well as net inflows at our asset manager. In the first quarter of the year, we reported EUR 256 million of operating capital generation and included seasonally higher mortality in the U.S. We remain on track to meet our guidance of around EUR 1.1 billion for 2024. The capital ratios of our main units in the U.S. and the U.K. remain healthy and well above their respective operating levels. Furthermore, cash capital at the holding amounts to EUR 2 billion, well above the operating level, despite making good progress executing the EUR 1.5 billion share buyback program. At the end of last week, we have completed 92% of this program. As we indicated earlier, we expect to complete the share buyback program by the end of June. Today, we are announcing a planned new share buyback program of EUR 200 million, which we expect to start at the beginning of July and to complete by the end of 2024. Commercially, the first quarter of 2024 saw Aegon maintain commercial momentum. The U.K. Workplace business and our business in Brazil are performing well, and we recorded net deposits in both segments of our asset manager. At the same time, we continue to see challenges in our U.K. Retail business. U.S. business again performed well. We continue to execute on our strategy to transform Transamerica into America's leading middle-market life insurance and retirement company while continuing to reduce exposure to financial assets. Before discussing commercial results, I would like to address the changes we have made to segment reporting in order to better reflect Transamerica's strategy and business model on Slide #3. We have decided to regroup Transamerica's businesses from 2 to 4 business segments that are fully aligned with our strategy. To reflect the importance of the World Financial Group, or WFG, for our strategy, we have created the Distribution business segment. The business segment Savings & Investments includes the asset-based businesses, retirement plans, mutual funds and stable value solutions. The third strategic assets business segment is Protection Solutions, which consists of the insurance products, including indexed annuities. This is a central focus area for further growth in the U.S. middle market. Finally, all Financial Assets have now been grouped together in one reporting segment. This includes variable annuities, fixed annuities, including single premium group annuities, the legacy universal life book and long-term care. This resegmentation provides more transparency on our growth areas while presenting the results of Financial Assets separately. Finally, the new business segments also take into account the applicable IFRS accounting standards with the insurance businesses included in Protection Solutions and Financial Assets and the noninsurance businesses grouped into Distribution and Savings & Investments. Let's move now to Slide #4 to discuss the recent commercial performance. Starting WFG, our ambition is to increase the number of WFG agents to 110,000 by 2027 while, at the same time, improving agent productivity. We remain on track with the number of licensed agents increasing by 13% compared with the end of March last year to 76,000. Agent productivity also continues to improve, thanks to the measures WFG has taken. The number of multiticket agents, which are agents selling more than one life policy over the last 12 months, increased by 12% compared with a year ago. Within the Savings & Investments segment, let me zoom in on our progress in midsized retirement plans. Here, net deposits amounted to $1.2 billion in the first quarter of 2024, an increase compared with the same period of last year. Net deposits in the reporting period were amplified by a large pooled plan sale that we wrote in the first quarter of last year. In this segment, we also recorded continued growth in ancillary products such as the general accounts stable value product as well as the individual retirement accounts. In each of these products now, $11 of assets are invested by our customers. In the Protection Solutions segment, we are investing in both product manufacturing capabilities and in the operating model in order to position the individual life insurance business for further growth. New life sales increased by 5%, largely driven by higher indexed universal life sales, partially offset by lower traditional life sales. WFG represented 71% of total Transamerica individual life sales in this quarter. And we continue to write this business with attractive IRRs in excess of 12%. So let's move now to the United Kingdom on Slide #5. In the U.K. Workplace channel, we continue to see solid levels of inflows driven by new schemes and net deposits on existing schemes. Net deposits in the first quarter of 2024 amounted to GBP 546 million and were slightly lower than the same period last year due to outflows related to the exit of a single low-margin scheme. In the Retail channel, we continue to see net outflows as investor sentiment across the industry remains weak due to the macroeconomic environment. Annualized revenues loss and net deposits amounted to GBP 5 million over the reporting period, and this was driven by the gradual runoff of the traditional product portfolio and the net outflows in the Retail channel. Combined, these more than offset the revenues gained on net deposits in the Workplace channel. On Slide #6, I want to address the progress of the international segment with our joint ventures in China, Brazil and the Iberian Peninsula as well as the TLB businesses in Singapore and Hong Kong. New life sales decreased by 15% compared with the first quarter of 2024. While we recorded continued good growth in Brazil, this was more than offset by weaker sales in China and Spain. Nonlife new premium production decreased by 12%, with weaker demand in Spain. Operating capital generation in the international segment decreased by 23%, reflecting asset mix changes in China. So let's turn to Slide #7 to comment on our Asset Management business. The Global Platforms business reported net deposits of EUR 2.6 billion in the first quarter of 2024, returning to positive net deposits after recurring net outflows over the last 2 years. Strong fund performance and a large contract win in our U.K. fixed income business drove that result. We also recorded good inflows in alternative fixed income products, one of our focus areas. In addition, the Global Platforms segment is benefiting from the asset management partnership with ASR. In the Strategic Partnerships segment, we also recorded positive net deposits over the reporting period amounting to EUR 2.1 billion. This was especially driven by our Chinese joint venture, AIFMC, in part due to a successful collaboration with the consumer finance platform for our money market fund. Operating capital generation increased by EUR 26 million compared with the first quarter of 2023 to EUR 43 million in the first quarter of this year. This was a result of higher earnings especially in AIFMC, our Chinese asset manager, which benefited from a onetime expense item. I will now hand over to Matt to discuss the financial performance of Aegon in more detail, which starts on Slide #8.

Thank you, Lard, and good morning, everyone. Let me start with an overview of our financial performance over the last quarter on Slide 9. I want to start with operating capital generation before holding funding and operating expenses, which amounted to EUR 256 million in the first quarter of 2024. This is 12% lower than the same quarter of last year, mainly reflecting a onetime benefit in the release of required capital in the prior year period. Free cash flow amounted to EUR 14 million during the reporting period, driven by remittances from our international business. Cash capital at the holding stood at EUR 2 billion at the end of March 2024. The decrease compared with the balance at year-end 2023 was almost fully explained by the progress made during the period on the EUR 1.5 billion share buyback program. Gross financial leverage was largely unchanged at EUR 5.1 billion and remains at our target level of around EUR 5 billion. On Slide 10, I want to talk about the capital ratios of our main operating units. U.S. RBC ratio increased by 9 percentage points compared to the end of 2023 to 441% and remains well above the operating level of 400%. Operating capital generation and market movements each contributed 6 percentage points to the ratio and more than offset a remittance from an operating company to an intermediate holding company. The favorable impact of market movements was primarily due to good equity markets. The solvency ratio of Scottish Equitable, our main legal entity in the U.K., increased 192% and is above the operating level. This reflects the positive impact from operating capital generation and some smaller favorable onetime items. Let's now turn to Slide 11 to address operating capital generation in more detail. In the first quarter of 2024, operating capital generation before holding funding and operating expenses amounted to EUR 256 million, a decrease of 12% compared with the prior year period. Lower operating capital generation in the U.S. and international businesses was partly offset by an increase in Asset Management. Earnings on in-force decreased by 5%. Adverse underwriting experience in the U.K. and higher mortality in the U.S. were partly offset by onetime expense benefits in Asset Management and at Transamerica. The release of required capital was 25% lower following a onetime capital release in the U.S. in the first quarter of 2023. New business strain increased by 9%, higher new business strain in the U.S. as a consequence of higher sales in individual life and retirement plans. This was more than offset by lower levels of new business strain in the U.K. due to the impact of the sale of the protection book to Royal London and in China due to lower sales. With EUR 256 million of operating capital generation from the units, reflecting seasonal mortality in the U.S., we are on track to meet our guidance for 2024 of around EUR 1.1 billion. [Audio Gap]

of Aegon has many chapters, and we are just at the beginning of the next chapter to lead -- to create leading businesses in investment, protection and retirement solutions. [Audio Gap]

Average or expected new business stream of about $16 million during the course of the quarter. So those are the puts and takes. You also have to take into account that some differences within the other businesses in Asset Management, as Lard had mentioned, we did have a onetime good-guy expense thing in the AIFMC Chinese joint venture of about EUR 17 million. And then we had some bad guys in China, mainly in international of around EUR 9 million. If you do all the puts and takes here to get to a clean run rate of about EUR 280 million, which puts us on track to get to the EUR 1.1 billion by the end of the year.

And is it in force for Financial Assets?

Yes, Financial Assets are just going to be choppy. I mean you are going to get that from time to time, and there are various variances that are coming in. But in general, we're looking at OCG guidance for the Financial Assets of around EUR 200 million a year through kind of 2027.

And your next question comes from the line of David Barma, Bank of America.

The first one is just a follow-up on OCG. So you're now tracking fairly in line with your yearly target. I would have expected higher equity markets, higher reinvestment rates, maybe a faster buyout in universal life as well to all be supportive this year and more supportive than we thought in the middle of last year. So is there any reason that all of these items shouldn't help you outperform the EUR 1.1 billion target? I'm aware that the new business strain is going up, but is that the only factor offsetting the benefits -- the positive items? And then secondly, I have a question on Distribution risk in the U.S., please. So we had a pickup in market concerns over insurance agent distribution practices in the last few months. So could you share your thoughts in this context about the -- such risks for WFG, please?

Yes, David. I'll take the second one first, and then we'll go to your OCG. So I'll talk about the Distribution. We're very pleased that we have -- WFG has a very strong and well status Distribution franchise as we aim to grow into the segment of middle-market America, so middle-market retail households. And this is particularly the area where the 76,000 agents are focused on. It is a well-established sales force with licensed agents with strong compliance processes in place and practices in place. So we are very pleased to have -- I'm proud to have that capability to underpin the growth that we aim to achieve in the life insurance business. Matt?

Yes. With respect to the market movements. So what I gave you before was sort of what's a clean run rate for the first quarter of the year, and it works out to be about EUR 280 million. But what you've got going on is you had equity markets in the U.S. up about 10% in the first quarter of the year. So that's going to bode -- we've got a little bit of tailwind behind us for performance throughout the balance of the year. And you might think something on the order of maybe EUR 50 million round numbers for the benefit of that for the remainder of the year. So maybe back -- bake a little bit of that into your forecast, but it really depends on what equity markets do for the balance of the year. It still gets you to, again, around EUR 1.1 billion, but you can do the math on it.

And Lard, can I just follow up on the first point? There's also -- also linked to Distribution but slightly different. There's a -- there could be a new set of fiduciary standards coming into force later in the year for retirement products. What would be the implication for Transamerica if that were to come through?

So you're talking about the Department of Labor fiduciary rule of -- and that's what it's -- how is it called, the -- in colloquial language? Well, first of all, we are all in favor of appropriate -- an effective regulation around the price. At the same time, we also believe that regulation needs to always be balanced to ensure there's proper access that clients can have to good advice. And this rule, it's a 500-page document. So we're still trailing through it and try to fully understand it. But where we are taken as we stand today is that we are very well positioned to deal with this. We already have quite extensive practices in place and documentation practices in place. So we need to adapt here and there some documentation and some processes. But nothing that we believe will have a material impact on our ongoing business or on our Distribution company. I do want to remind you of one thing though, David. I don't know to what extent you're familiar with that. Something similar was introduced in 2016 and was subsequently, in court, thrown out. And what we are observing since this rule came out a couple of weeks ago, 10 days ago, is that, indeed, a legal action like we saw in 2016 is -- has started to commence already. So we also need to evaluate whether -- depending on how that goes, whether this rule, if and when and how this rule be indeed implemented. Let's put it that way.

And your next question comes from the line of Farooq Hanif from JPMorgan.

I just want to say congratulations to both Matt and Duncan, please. But just 2 questions. Firstly, on the STOLI, the institutionally owned life policies, will there be an ambition to go beyond the 40% if you think there's appetite for this? And what are your views on that? And the second question is on the choice of EUR 200 million. Is it just a number that you think is appropriate to get down to your cash target? Or what was the thought process around EUR 200 million specifically?

Let me take -- will you first [ comment ] the STOLI? [indiscernible] in a second.

So a brief recap. So we set that ambition, 40% of the targeted policies, the $7 billion face amount by the end of 2027, but we're already sitting at 34%, which is really good, right? So we had invested about $700 million into the program. Currently, we've been able to recycle a lot of that. So we've actually been able to purchase contracts worth about $1.2 billion so far. So I would say it all depends on pricing. 40% is a -- it's a good ambition. We'll look at it as we go forward. We want to make sure that we get the good returns that we're expecting out of this before we get ahead of our skis here. So for right now, we're going to keep the 40% target out there. We'll see what the market gives us, and we could go beyond that maybe, but right now, we're just making good progress.

Yes, and Farooq, very kind of you. Your congratulations to Duncan and to Matt are well received. Thank you. On the share buyback, well, it derives from our capital management framework. Simply put, if there is surplus cash capital beyond what we need to execute on the transformation as a company and if we cannot invest it in value-creating opportunities, then we will return it to shareholders in the most efficient form. This is our capital management mantra since the beginning of my tenure here. And we are, as you know, in the market with a EUR 1.5 billion buyback. We are at the tail end of that. We still need to do a little bit, but it's going to be finished before the summer. We are above the target operating range for our cash position. And so it's very -- and we've observed that it's very likely that our cash position will still be above the range. So we said, okay, we evaluated it and said that we're announcing a new buyback program today of EUR 200 million, which we will complete by the end of -- until -- before the end of this year.

And may I just ask and I'll understand if you don't answer this, but what the nature of your conversations with ASR about how they would like to progress going forward. So I mean what would your preferred option be if ASR decided, for example, to start a certain share buyback program?

We -- well, first of all, I'm on the Board of ASR. So any discussions that take place there is something that I think is not appropriate for me to comment on. But I don't know whether you're pertaining to the stake itself or what about any other comments around ASR and its own policies around this is something that I leave to [ us ].

[Operator Instructions] And your next question comes from the line of Michael Huttner from Berenberg.

Just like Farooq said, congratulations, Matt and -- on a very successful performance and also to Duncan to make it to CFO. I had to, just like the others -- Protection Solutions, you seem to stress that a couple of times in growth. Can you say if you're looking at deals and what kind of deals, what's your thinking there? And then I'll go back to the question, which was about the operating capital generation, but I assume it more broadly. Normally, when have a quarter, you kind of raise guidance of this target or that target or the -- one of the many targets you have. This time, you haven't raised any single target, which is -- I think it's -- that's actually a one-off. Is there something in the background which is running more slowly or you're more worried or you kind of think, well, actually Duncan can take the glory when it happens? [ That'd ] be understood.

I see 2 gentlemen with a smile on their face, so thank you for congratulating them. And frankly, from my personal perspective, as you know, I know both gentlemen for a very long period of time, and I couldn't have wished for a more flawless transition quite frankly. So when it comes to protection and solutions, this is the segment that encompasses, in the U.S., the life insurance and annuity business. We are growing that now a number of quarters, already quite pronounced. And in this quarter, you could see an additional kind of growth continuing. That is, of course, largely powered by our efforts to grow the licensed -- the professional sales agency that we have, which has now increased to 76,000 agents. We are aiming to do a couple of things here: increase the number to 110,000 in North America; number two, increasing the number of agents that sell multiple tickets; and increasing, as a result, the overall growth of the platform. By the way, it may be good to note that when you want to evaluate the strength and the power of that platform, there's 2 things as you need to look at, which is -- in the future, which is the Protection Solutions segment, which picks up the earnings on the manufacturing of the product; and then the Distribution segment, which will now highlight the earnings that we are making as a distributor as well. So I think it's important to combine the 2 to appreciate the full attractiveness of that business. Separately, we're also, of course, having other Distribution channels in WFG, and we're focusing our efforts on that as well to continue to grow and make sure that, in the annuity and life insurance product lines, that we progress further. When it comes to the OCG, Matt?