Earnings Call Transcript - AEG Q4 2023

Yves Cormier, Head of Investor Relations

Thank you, operator, and good morning to everyone. Thank you for joining this conference call on Aegon's second half year 2023 results. My name is Yves Cormier, and I'm the Head of Investor Relations. Joining me today are Aegon's CEO, Lard Friese; and CFO, Matt Rider, to take you through the highlights of the year, our financial results and the progress we are making in the transformation of Aegon. After that, we will continue with a Q&A session. Before we start, we would like to ask you to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. And on that note, I will now give the floor to Lard.

Lard Friese, CEO

Good morning, everyone, and thank you for joining us on today's call. I will run you through our strategic and commercial developments before handing over to Matt, who will run through the financial results in more detail. Let's move to Slide number 2 to review our achievements in the second half of 2023. 2023 was another important transformational year for Aegon. During the year, we completed the transaction with ASR, initiated a significant share buyback program, reduced our gross financial leverage, presented our ambitions for the coming years at our Capital Markets Day last June, and moved our legal set-up to Bermuda. At the same time, we have remained laser-focused on improving returns from our businesses and generating value for shareholders, which we will continue to do. The second half of 2023 saw Aegon maintain commercial momentum, mainly driven by the strong performance of our U.S. business. We have exceeded our financial commitments for 2023 and remain committed to our targets for 2025. I'm very proud of everything the teams have achieved in 2023, and I'm grateful for all of their hard work during the year. We will continue to work hard executing our strategy in 2024, and I am optimistic about our prospects. In the second half of 2023, operating capital generation before holding funding and operating expenses was 16% higher than in the same period of 2022. Earnings on in-force rose by 16%, driven by business growth in U.S. strategic assets and management actions we have taken on the financial assets. Over the full year 2023, operating capital generation before holding funding and operating expenses was 14% higher than 2022 at nearly EUR1.3 billion, well above our guidance. The IFRS operating result decreased to EUR681 million in the second half of 2023, due in part to the impact of management actions we have previously taken as well as several favorable one-time items in the previous year. Shareholders' equity per share has remained stable despite the significant distribution of capital to shareholders. The capital ratios of our units remain strong and well above their respective operating levels. Furthermore, cash capital at the holding amounted to EUR2.4 billion, well above the operating level despite reducing leverage by EUR500 million in the fourth quarter and making good progress executing the EUR1.5 billion share buyback program. At the end of last week, we have completed 76% of this program, which means we have already returned more than EUR1.1 billion to stockholders through this program alone. In addition, our strong commercial performance, together with the important steps we have taken to realign our company, have given us a solid foundation on which to sustainably grow our dividend per share. We have increased the proposed final dividend for 2023 to EUR0.16 per share. And subject to shareholder approval, this would bring our full-year dividend to EUR0.30 per common share, up more than 30% compared with 2022 and in line with our guidance.

Matt Rider, CFO

Thank you, Lard. Good morning, everyone, and thanks again for joining us today. Let me start with an overview of our financial performance over this last half year, beginning on Slide 10. In the second half of 2023, the IFRS operating result decreased by 32% compared to the prior year period to EUR681 million, mostly driven by the performance of the U.S. The operating result, however, should be interpreted in combination with other movements in the balance sheet under IFRS 17, such as the CSM and shareholders' equity. On a per share basis, shareholders' equity has remained stable over the period despite material distribution of capital to shareholders. At the same time, we are seeing good results in the financial metrics on which we primarily steer the business. First, our operating capital generation before holding funding and operating expenses increased by 16% over the second half of 2023, coming in at EUR660 million. This brings the full year amount to EUR1.3 million above our guidance. Free cash flow was strong as well in the second half of 2023, amounting to EUR429 million following the receipt of planned remittances from all units. Cash capital at the holding stood at EUR2.4 billion at the end of December 2023. Proceeds from the ASR transaction and the remittances from the units were partially offset by capital return to shareholders and the redemption of a EUR500 million matured senior bond. This redemption means that we have also achieved our target of having a gross financial leverage of around EUR5 billion. The group solvency ratio decreased by 9 percentage points since the end of June 2023 to 193%. The impact of the ASR transaction, associated share buyback, and the incorporation of our stake in ASR were in line with the guidance we had previously provided. This was in part offset by capital generation as well as the beneficial impact of the U.K. solvency reform, which is reflected in our group solvency ratio.

Lard Friese, CEO

Let's turn to Slide number 3 to discuss the commercial results of our units. Starting in the Americas, one of the two focus areas in our U.S. Individual Solutions business is World Financial Group or WFG, our life insurance distribution network. Let me remind you, our ambition is to increase the number of WFG agents to 110,000 by 2027, while at the same time, improving agent productivity. Momentum has been strong throughout the year. During 2023, the number of licensed agents has increased by 18% compared with year-end 2022 to nearly 74,000. In addition, the improvement in Aegon productivity is a priority for us. The number of multi-ticket agents, which are agents selling more than one life policy over the last 12 months has increased by 12% compared with a year ago. Transamerica's market share of life insurance products sold by WFG in the U.S. remained high at 64%. This is due to the consistent service experience we deliver to WFG agents, combined with the tailored products we manufacture for WFG by the field to middle market consumers which are key demographic. Let's move to Slide number 4 and I will address the second focus area of our U.S. Individual Solutions business, Individual Life Insurance. Here, we are investing in both product manufacturing capabilities and the operating model in order to position the Individual Life Insurance business for further growth through WFG and third-party distributors. Commercial momentum was strong throughout the year. New life sales increased by 13% compared with 2022, largely driven by higher indexed universal life sales. Importantly, we have been able to maintain the profitability of new sales, achieving internal rates of returns in excess of 12%. Increased sales of individual life insurance in 2023 led to an increase in new business stream up 10%. Business growth was also the main driver of the 31% increase in earnings on in-force compared to the full year 2022. Slide number 5 addresses the progress we have made in the U.S. Workplace Solutions Retirement Plans business. Transamerica aims to increase the earnings on in-force from its Retirement business by leveraging its capabilities as a record keeper with the ambition to materially increase the penetration of ancillary products and services it offers. During 2023, commercial results were strong in our focus area of midsized plans. Here, written sales rose by 72% compared with 2022, and net deposits amounted to $1.2 billion in 2023. We also saw good growth in ancillary products such as the general accounts stable value product as well as in individual retirement accounts. This is in line with our strategy to grow and diversify our revenue streams. The decrease in earnings on in-force of our strategic assets in the Retirement Plans business was driven by higher expenses, largely related to increased employee and technology expenses. Let's move on to the United Kingdom on Slide number 6. We continue to make good progress on our strategic agenda of investing and growing our platform activities. From a commercial perspective, the year has been characterized by two different trends. The workplace channel showed strong commercial results throughout 2023. Net deposits in the workplace channel amounted to GBP1.8 billion in 2023. However, if we exclude the exit of a single large and low-margin scheme in the third quarter, the net deposits would have amounted to GBP2.7 billion in 2023. The solid net deposits in the workplace channel reflect inflows from the onboarding of new schemes as well as higher net deposits on existing schemes. We expect this trend to continue. In the retail channel, on the other hand, commercial results continue to be hampered by the current macroeconomic environment, which has negatively impacted investor sentiment across the industry. Net outflows in the retail channel amounted to GBP3.1 billion in 2023 and explain in part the overall GBP16 million of annualized revenues lost on net deposits in the year. The remainder is due to the impact of gradual runoff of the traditional product portfolio, partially offset by revenue gains on net deposits in the workplace channel. On Slide number 7, I want to address the growth markets where we continue to make steady progress. New life sales in our growth markets increased by 18% compared with 2022 with good growth in both Brazil and China, offsetting weaker sales in Spain, in part due to a divestment there in the previous year. Over the same period, non-life new premium production increased by 15% as weaker demand for property and casualty products was more than offset by growth in accident and health insurance. Operating capital generation in the International segment excluding TLB increased by 8% in 2023 compared to 2022 as a result of business growth and more favorable new business strain. I'm turning now to Slide number 8 to comment on our Asset Management. Market conditions have been especially challenging for fixed income-focused asset managers such as our Global Platforms business, as interest rates rose in 2022 and '23. In the latter months of 2023, however, interest rates stabilized and commercial results have improved, especially in the fourth quarter. For instance, in our mortgage funds. In addition, we are benefiting from the new asset management joint venture with ASR as well as the other strategic initiatives we have undertaken recently. Net outflows in our global platforms amounted to EUR600 million for the full year 2023, but they were negligible in the second half of the year. In the Strategic Partnership segment, net outflows amounted to EUR2.8 billion in 2023. The La Banque Postale Asset Management joint venture experienced net outflows mainly due to the departure of a low-margin business of a former shareholder. Meanwhile, in the joint venture, AIFMC, net outflows were driven by continued weak investor sentiment in China. These unfavorable market conditions and net outflows drove the decrease of operating capital generation in '23 compared with the year before 2022. Now, I hand over to Matt to discuss the financial performance of Aegon in more detail, starting on Slide number 9.

Matt Rider, CFO

Thank you, Lard. Let me walk you through the key points regarding the second half of the year. We reported EUR306 million of operating capital generation from the business units, exceeding analyst expectations. This was mainly due to some one-time benefits from International. The U.S. results were relatively stable, with some unfavorable mortality experience balanced out by morbidity and positive operating items. Overall, the U.S. performance was solid. If you consider a clean number of approximately EUR275 million for the quarter, that annualizes to about EUR1.1 billion, which aligns with our guidance. However, there are several factors to consider for 2024. We have some favorable conditions, as equity markets ended strong at the year's end, and we typically perform better on operating capital generation with higher asset levels. The most significant factor driving the EUR1.1 billion forecast is the expected increase in new business stream, which should exceed what we experienced in 2023.

Lard Friese, CEO

Yes. Thanks, Andrew. This is Lard. Let me address that last question and then pass it back to Matt regarding the OCG. We have certainly taken note of the transaction in the U.S. However, each transaction is unique with its own specifics. While it is an interesting signal and we are monitoring the space closely, I cannot comment on that in a broader context.

Matt Rider, CFO

Yes. At the Capital Markets Day we held this past June, we mentioned our goal to grow U.S. remittances in a mid-single digits range. We do not expect to change that outlook. In 2023, we received $550 million in remittances, so we anticipate similar mid-single digits growth in 2024.

Lard Friese, CEO

Thank you, David. Matt?

Matt Rider, CFO

On the Retirement Plans business, indeed, the operating result is down a bit. The building blocks are really the amount of money that we take off of record-keeping fees plus ancillary benefits plus other bits and, for example, general accounts stable value. We have seen some outflows overall in the Retirement Plans business. Our aim is actually to keep the AUM pretty stable over the planned projection period and really make up in the margin difference with these ancillary benefits.

Lard Friese, CEO

Yes, thank you very much. I'll address the first question, and I’ll ask Matt to take the second. First of all, we're actively working to complete the EUR1.5 billion buyback that is currently in progress. As we mentioned in the call, we still have about 24% to 25% remaining. Therefore, our primary focus is on that, which means we will be purchasing a significant amount of trading volume in our own shares.

Matt Rider, CFO

Yes, let me pick up the review to reinsure piece. So indeed, we saw this reinsurance entity in Bermuda. We reinsured the block of fixed deferred annuities about $4.6 billion. But the reason why we do that is to align the capital framework for fixed deferred annuities with our economic view of the risk. So moving these liabilities for Bermuda and the separate entity has allowed us to do this.

Lard Friese, CEO

Just as a follow-on on that, I mean, is there a time frame to which you kind of expect that mortality element to drop out? And similarly, what's the dynamic behind the onerous contracts component as well?

Matt Rider, CFO

The onerous contracts involve several factors, particularly related to how experience variances are allocated within the income statement, specifically in the CSM. I hope you were paying close attention during my explanation, as many of the experience variances you observe are actually counterbalanced in the CSM.

Yves Cormier, Head of Investor Relations

Thank you, operator. This concludes today's Q&A session. On behalf of Lard and Matt, I want to thank you for your attention. Should you have any remaining questions, please do get in touch with us in Investor Relations. Thanks again, and have a good day.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.