Earnings Call Transcript - AEG Q1 2025

Yves Cormier, Head of Investor Relations

Good morning, everyone. I would like to welcome you to this conference call on Aegon's First Quarter 2025 Trading Update. My name is Yves Cormier, Head of Investor Relations. And joining me today to take you through our progress are Aegon's CEO, Lard Friese, and CFO, Duncan Russell. Before we start, we would like to ask you to review our disclaimer on forward-looking statements, which you can find at the end of the presentation. With that, I would like to give the floor to Lard.

Lard Friese, CEO

Thank you, Yves, and good morning, everyone. I will start today's presentation by running through our strategic and commercial developments before handing over to Duncan, who will update you on our capital results in more detail. So let me begin on Slide #2 with the key messages for the quarter. In Q1 2025, we continued to execute our strategy to grow and transform our businesses. And despite the recent volatility in the financial markets, we are confident in our ability to deliver on our strategy and our targets. Operating capital generation before holding and funding expenses amounted to €267 million, driven by business growth in most strategic assets, which was partly offset by unfavorable mortality experience in our U.S. financial assets. From a commercial perspective, it was a good quarter. In the U.S., World Financial Group continues to grow its agent base. Life sales increased in both WFG and our Protection Solutions business. In retirement plans, we generated positive net deposits overall and written sales were strong once again although we experienced some outflows in midsized retirement plans. In the U.K., trends remain consistent with the path set out at our teach-in webinar last year. In International, we recorded an 11% year-over-year increase in new life sales after some slower quarters last year. Asset Management generated solid net deposits from third-party clients on its global platforms business, but there were net outflows in our joint ventures. The capital position of our operating units also remained very solid as we entered the period of market volatility at the beginning of April. Looking forward, we expect to achieve all the group financial targets for 2025 as set out at our last Capital Markets Day in 2023. Consistent with our plan to reduce our cash capital at holding to around €1 billion by the end of 2026, we also announced today a planned new share buyback program of €200 million. This program is set to commence at the beginning of July and is expected to conclude before the end of the year. It follows the €150 million program we are currently executing and demonstrates our ongoing commitment to returning excess capital to shareholders unless we can invest it in value-creating opportunities. Let's now move to Slide #3 to discuss the recent commercial performance of the Americas. In the first quarter of 2025, we continued to grow Transamerica's business, which is focused on middle-market America. Starting with World Financial Group, the number of licensed agents increased by 16% to 88,000 compared with the same quarter of last year. We saw higher activation rates of WFG agents resulting from WFG's activation program that offers training and various forms of support to help newer agents improve their productivity. While this has not yet resulted in an increase in the number of multi-ticket agents, Transamerica's market share in WFG increased to 66% from higher agent productivity in selling Transamerica's products. Consequently, new life sales in Transamerica's Protection Solutions segment increased on the back of higher sales by WFG. Furthermore, within Protection Solutions, we continue to see growth in the RILA product, thanks to further improvements of our wholesale distribution productivity. We have established ourselves now as a top 10 player in this field in terms of sales in the U.S. market. In the Savings & Investments segment, we recorded higher net deposits in our retirement plan business compared with last year, driven by large market plans. In midsized plans, we recorded net outflows of $283 million during the period due to lower gross deposits and elevated participant withdrawals. Written sales remained strong this quarter, which we see as a positive indicator for future growth in this segment. Within the Retirement Plans business, we saw further growth in the general accounts stable value product and in IRAs as we work to increase profitability and diversify revenue streams. Let's move on to an update on our other businesses on Slide #4. At Aegon U.K., we remain on the path set out at our strategy teach-in in June last year. Commercial momentum in the Workplace platform business remains strong. In the Adviser platform, we continue to see the adverse impact of ongoing consolidation in nontarget adviser segments as well as elevated levels of withdrawals. In the International segment, higher new life sales were generated in our joint ventures in Brazil and China. Both new life sales as well as non-life sales improved in our joint ventures with Santander in Spain and Portugal, while TLB is setting out on a path for profitable growth with the opening of a new representative office in Dubai. Our Asset Management business experienced positive third-party net deposits during the period. In the Global platforms business, this decrease was attributed to higher net deposits in the first quarter of the previous year due to the onboarding of a large client. In Strategic Partnerships, net outflows occurred as clients withdraw money from mutual funds in China. With that, I will now hand over to Duncan to discuss our financial performance in more detail.

Duncan Russell, CFO

Thank you, Lard. Good morning, everyone. Let me start with an overview on Slide 6. Operating capital generation before holding, funding and operating expenses was €267 million, an increase of 4% year-on-year. Free cash flow amounted to €34 million in the period, and mainly reflected a remittance from a joint venture in international as well as €19 million of proceeds from ASR share buyback program. Cash capital at holding stood at a very healthy €1.6 billion at the end of March. Gross financial leverage amounted to €5.1 billion, consistent with our target level. I'm moving now to Slide 7, where we address operating capital generation or OCG. OCG increased by 4%, reflecting overall business growth. OCG from the U.S. increased by 3% as business growth was partly offset by unfavorable claims experience. The first quarter was impacted by unfavorable mortality claims experience, part of which was expected from seasonality. The claims experience largely occurred in Universal Life, a financial asset where we saw a higher number of claims, especially from old age policies. We continue to expect a quarterly OCG run rate for the Americas of $200 million to $240 million for the remainder of the year. In the U.K., operating capital generation benefited year-on-year from markets and improved underwriting experience. In the International segment, positive underwriting experience at TLB resulted in an increase of OCG to €33 million. In the first quarter of 2024, OCG from Asset Management benefited from a favorable nonrecurring expense item. Excluding this item, Asset Management's contribution to OCG increased. Finally, we confirm our target of around €1.2 billion operating capital generation for 2025. And I will now turn to Slide 8 for an update of our capital position. In the first quarter, the capital positions of our business units remained robust and above their respective operating levels. The U.S. RBC ratio decreased by 7 percentage points compared with the end of December to 436%. Market movements and one-time items, including management actions, both respectively, had a 5 percentage points negative impact on the ratio. The payment of a dividend from an operating company to our U.S. intermediate holding to prefinance the planned half-year remittance to the group had a further 3 percentage points negative impact. Operating capital generation contributed 6 percentage points to the RBC ratio. With respect to recent developments, the financial markets were very volatile in April, but during that period, our hedging programs performed as intended. In the U.S., this higher volatility resulted in an additional impact from hedging rebalancing and cross effects, which is expected to have a single-digit negative impact on the U.S. RBC ratio in the second quarter. Consequently, the impact of the market movements in the second quarter could be estimated using the newly published sensitivities in the back of the presentation and adjusting for the one-time negative impact from market volatility I just referred to. In the U.K., the solvency ratio of Scottish Equitable increased by 3 percentage points to 189% driven by the operating capital generation. I now turn to Slide 9 to give you an update of our discussions with the BMA. In 2023, Aegon's group supervision was transferred from the Dutch Central Bank to the BMA and the transition period was agreed upon, which ends in December 2027. We announced today that Aegon will apply an aggregation approach to calculate its group solvency ratio under the Bermuda solvency framework after the transition period. This is a very similar approach to the one that is currently taken by Aegon. And consequently, the impact on the group's solvency ratio from the updated calculation method will be minimal. Furthermore, the BMA has concluded its review of the eligibility of Aegon's capital instruments. Aegon's Solvency II compliant instruments will continue to be eligible under the Bermuda solvency framework in the corresponding tiers under Solvency II and without further limitations. The €1 billion Junior Perpetual Capital Securities, which were treated as Grandfathered Restricted Tier 1 until January 1, 2026, under Solvency II, will now be eligible as Tier 2 Ancillary Capital following that date and until the end of 2029. Subject to review in 2029, this eligibility may be extended. The €423 million perpetual capital subordinated bonds will lose capital eligibility as of January 1, 2026, consistent with current grandfathering treatment. On a pro forma basis, taking into account the upcoming end of the eligibility for the perpetual capital subordinated bonds, Aegon's group solvency ratio would have been 6 percentage points lower compared with the group solvency ratio of 188% at the year-end 2024, if this updated capital instrument eligibility had been applied at that time. With that, I will now move to Slide 10 to talk about our cash position. Cash capital at holding has barely changed over the period and remains extremely healthy. We returned €102 million of capital to shareholders through share buybacks, part of which will be used to share-based compensation plans. Free cash flow amounted to €34 million. Consistent with our capital management framework and our objective to reach the midpoint of the operating range for cash capital at holding at the end of 2026, we today announced a planned new share buyback program of €200 million. The program is to start at the beginning of July 2025 and is expected to be completed before year-end. To wrap up on Page 11, taking into account both our performance in the first quarter of 2025 and the recent macroeconomic developments, we remain well on track to achieve all of our financial targets for 2025.

David Barma, Analyst

Firstly, I wanted to ask about your commitment to reducing holding cash. So you'll now be buying back €200 million worth of shares in the second half, which still leaves you considerably above the €1 billion target by the time we get the full year '25 results. And this gives the impression that deploying capital towards maybe M&A might now be higher on your priority list than returning it to shareholders. So can you talk about your views on this and how to balance the two? And I'll pause here and ask my second question after.

Lard Friese, CEO

Yes. Thank you, David. I'll hand over to Duncan. Duncan?

Duncan Russell, CFO

Sure. David. No, the commitment to reducing our cash capital from what is currently €1.6 billion, i.e., above our target range of €0.5 billion to €1.5 billion to the €1 billion by the end of 2026 is firm. So there's no change in that commitment at all. And we've always said that there are three means by which we could do that. The first is reducing leverage, which with the current portfolio, we don't think we need to do. The second is investing in growth opportunities organically or inorganically. And the third is returning that money back to shareholders. And today, the announcement of €200 million is a step forward in that direction, but the commitment is that by the end of '26, which is not that far away, we'll be back down to the €1 billion of holding cash capital. If I take a step back because I think you're asking why only €200 million and etc. Internally, we looked at three things. The first question we ask ourselves is how much capital do we need to utilize in order to bridge from where we are today to the €1 billion at the end of the period. The second is how will we get down there. So what is the form in which we'll do it. And as I mentioned, that could either be investing in growth opportunities or returning it to shareholders, either share buyback or special dividends. And the third is then how quickly do we do it. And as I pointed out, between now and the end of 2026, is not that long a period of time. And then our preference is to spread it over that period in order to take into account potential volatility in financial markets and to manage through that.

David Barma, Analyst

Secondly, I wanted to ask about in-force management because we've seen a real pickup in activity in the U.S. recently with transactions taking place across most of the types of business that you have in your financial assets. Are you looking to participate in this market? Or do you not see good enough opportunities at the moment to do third-party transactions?

Lard Friese, CEO

Yes, you can take that. Yes.

Duncan Russell, CFO

There's no real change there. It's fair to say that compared to when we started and classified a significant portion of our balance sheet as financial assets several years ago, market depth from a demand perspective has definitely increased, and we've observed many transactions occurring. We've consistently stated that there are three ways we can reduce our required capital. The first is through unilateral actions that we can implement on our own. The second involves bilateral discussions with either customers or regulators regarding management actions. Lastly, the third consists of transactions with third parties. We have engaged in some third-party transactions recently, although they have been of relatively small scale. We continue to actively consider this avenue and will pursue any opportunities that align with our criteria.

Farooq Hanif, Analyst

My first question is about the buyback. Are you indicating that there will not be any more buybacks this year, or is that still open depending on market and your circumstances? I would like some clarification on that. Secondly, regarding the OCG guidance of €1.2 billion that you reiterated this year, doesn't that guidance seem conservative considering the nonrecurring items mentioned in the first quarter? If you could elaborate on that, since the underlying OCG appears to be slightly better. Additionally, could you confirm or discuss any connection to IFRS regarding these variances? My understanding is that OCG does not experience significant updates to assumptions due to the U.S. regime and is therefore more susceptible to variances. What can you say about the IFRS variances?

Lard Friese, CEO

Okay, I'll address all three points. Regarding the share buyback, we expect to complete the announced buyback that will start in early July before the year-end. We are committed to reducing our capital to €1 billion by the end of 2026, and we will consider how much capital we need to return and our investment options for growth. While nothing is off the table, our commitment remains to reach that €1 billion target by the end of 2026. On the topic of IFRS versus OCG, you're correct that there are differences in the reserving basis. We do not publish IFRS quarterly, so I won't delve into that. However, I can point you to the guidance provided at the end of last year regarding the expected run rate for both U.S. and group IFRS operating profit. Finally, concerning the OCG run rate, I mentioned at year-end that some units, particularly in the U.S. and U.K. Asset Management, are performing better than the original 2023 targets. However, we are experiencing some challenges internationally, mostly due to lower interest rates in China. This trend still holds. If we adjust the OCG by adding back the variances from the first quarter, we arrive at approximately €321 million for the group. If we multiply that by four, it comes just under €1.3 billion, specifically €1.284 billion, exceeding our €1.200 billion target. However, if we take the run rate times three and add the first quarter, we end up slightly above and in line with our previous guidance of €1.20 billion.

Nasib Ahmed, Analyst

Firstly, on the financial assets in the U.S., you've still got about €1.4 billion to go to get it down to €2.2 billion over the next 2.5 years. How much of the €1.4 billion can you get through just natural runoff? And how much would need something like you described, Duncan? And then the second question is around the dividend, €0.40 intact, but you've done quite a lot of buybacks since you set out that number. What's your kind of capital return policy? You're talking about buybacks, but could you also increase the dividend per share to get the holding company cash down to the €1 billion?

Duncan Russell, CFO

So on the dividend, the dividend policy, I think, is fairly clear, the €0.40 to €0.40, and we'll aim to grow the dividend in line with our free cash flow. So that's a structural topic. The cash capital in the holding is excess capital because we target a range of €500 million to €1.5 billion and we want to get down to €1 billion. So I don't think we'll deal with that excess capital through a run rate dividend increase versus our dividend policy. That will be instead dealt with either through share buybacks, special dividends or investing in growth. On the financial assets, you're right that we still have quite a move to go in terms of the current position versus the targeted end position. In 1Q, we had some impacts from market movements, which increased the required capital on variable annuities on our variable annuity book. I go back to the original Capital Markets Day, there is a natural runoff in the portfolio, which varies by portfolio. So the variable annuity book runs off fairly steadily. Other parts of the book, for example, long-term care take a lot longer just because of the way the reserving works there. So we are dependent and we do need to put in place management actions to hit the target. Those actions could be, again, the unilateral or bilateral actions, which don't rely on transactions, but do still require effort on our part to get down there and/or through third-party deals. I think it's likely that if we will need to do some third-party actions in order to get the target.

Iain Pearce, Analyst

The first one is if you could just touch on the hedging program and how that performed in the market volatility that we've seen sort of post quarter end? And also if there's been any learnings or anything you've seen in the performance of that hedging program that you've been able to implement or improve going forward? And the second one was just on the new business. Pleasing to see a return to a positive trend there. Just trying to understand if you see this as a base on which we're now expecting to see a return to the rates of growth you were seeing previously? And if you view the sort of performance in H2 last year as just a blip or if you're still seeing improvements in productivity embedded to come?

Lard Friese, CEO

Thank you, Iain, for your questions. Let me address the new business question first, and then Duncan can discuss the hedging program and its performance. Regarding new business, if we look at the overall trading update we're providing today, we are seeing commercial momentum across nearly all our business lines except for the Adviser platform in the U.K., which we anticipated. Additionally, while third-party assets showed positive net flows, the growth was slightly lower compared to the same period last year. In the U.S., particularly with WFG, we have grown our agency sales force to 88,000, a 16% increase from last year. Our goal is to grow that number to between 100,000 and 110,000 in the coming years, and we are on track to achieve it. As for life insurance sales, we experienced a subdued sales profile in the fourth quarter, but this quarter saw significant improvement. WFG has increased its life sales, and we've also introduced a new life insurance product in the broker channel, which has been well received, resulting in a 7% rise in sales volumes. Our teams have worked closely with WFG to onboard new agents, and while there can be a time lag before agents begin to produce significantly, we are seeing positive effects from these efforts. Regarding RILA sales, we are now among the top 10 players in this segment and have had strong sales, reflecting good momentum. On the retirement side, we noticed overall net growth in our deposits, with some outflows of €238 million in the mid-market plans, but we have a robust sales profile. Strong written sales in recent quarters suggest we can expect assets to contribute positively in the near future. Internationally, we are seeing growth returning in Brazil and a slight uptick in China, despite a challenging environment. In Iberia, we continue to advance our successful joint ventures with Banco Santander. In the U.K., the Workplace business remains strong, while the Adviser platform is in need of improvement, a process we've outlined at our Capital Markets teach-in last June, which will take time to develop.

Duncan Russell, CFO

The hedging program performed as expected, and we were pleased with the results. The single-digit impact on the RBC ratio was noted, as the variable annuity book experienced a modest drag due to higher rebalancing costs. This was primarily because the realized volatility exceeded our implied volatility assumption. Additionally, there was some modest drag from unhedged exposures in the IUL and RILA segments. Regarding the VA book, we were very satisfied, which reflects the significant work done over the years and our comprehensive understanding of that business. As the IUL and RILA segments grow, we will adapt our hedging programs accordingly.

Michele Ballatore, Analyst

The first question is about holding cash. Can you remind us of any potential debt reduction impact over the next two years that may influence the level of holding cash? The second question is regarding long-term care, particularly the net present value of the rate increases you mentioned. It seems to be performing well against your target. Can you clarify whether these metrics have any impact on capital employed or capital generation in general?

Duncan Russell, CFO

We are comfortable with our current debt level of around €5 billion, given our portfolio mix. We would only consider a structural review of this if there were changes to the portfolio. There can be minor adjustments we can make, but we do not need to significantly reduce leverage or utilize cash for that purpose. Regarding long-term care, we manage that by implementing premium rate increases in response to changes in our liability cost estimates. Our goal is to maintain a positive local cash flow test of PDR and ensure that the long-term care book does not negatively affect our capital over the medium term. Therefore, it does not impact our cash generation; it's a strategy to counterbalance increases in liability costs.

David Barma, Analyst

Just a few follow-ups, please. Firstly, on the capital generation in the U.S., if I adjust Q1 for the various items that you flagged, it seems like it's quite a bit better than the underlying over the last few quarters and above the run rates that you mentioned at the start of the call, Duncan. So can you just explain what the drivers are for this good underlying performance in the U.S.? And then secondly, on new business, sorry, Lard, I couldn't quite get your answer about RILA's earlier. So pardon me, but I'm just going to ask this again. So when we spoke at Q4, you suggested that the benefits from higher interest rates and were being reinvested in growth in RILA and stable value. And I'm not quite sure how to see that in the data you're giving in Q1. So could you maybe give us a bit of color on the commercial performance in both? And then lastly, on the equity sensitivity in the U.S. So that's gotten better with lower equity markets. But is there anything that can be done to reduce the VA flooring issue? I think some of your peers have measures to do that, or is it just something that we need to deal with and that will just depend on the level of equity markets?

Lard Friese, CEO

David, yes, so regarding RILA, sales increased this quarter, which is what I meant to convey. Since we introduced the registered index-linked annuities product line approximately 1.5 years ago, we have seen steady growth, and this quarter was no exception. So, there were more sales, which is what I intended to communicate.

Duncan Russell, CFO

Okay. David, let me address the other two questions. Regarding the U.S. OCG, you are correct. This aligns with what I previously mentioned about several of our business units performing better than the original 2023 targets, with the U.S. being one of them. If you annualize the normalized OCG for the first quarter, it stands at a good level compared to the 800 million target we set for 2023. This is due to various factors. The business is growing well, we've been able to reinvest effectively from an interest rate perspective, and equity markets have been trending upward over time, although we did make some assumption changes last year that had an impact. Overall, we are performing well against the original target in the U.S.

David Barma, Analyst

Sorry, it's also significantly better than the underlying of the last few quarters. You were running around $205 million, $210 million max during 2024. On an underlying view in the U.S., you're now closer to $240 million, $250 million. Is that mostly the interest rate effect?

Duncan Russell, CFO

We anticipate a range for the year between $200 million and $240 million. In the first quarter, we achieved $224 million on an underlying basis, while last year's fourth quarter was $213 million. We are seeing positive trends supported by market conditions and some commercial progress. Therefore, I believe we are still within the expected range. Regarding the slowdown from the VA, we did not take any steps in the first quarter. As mentioned at year-end, the slowdown was affecting us along with certain sensitivities. To simplify, any market downturn tends to negatively impact us. Given our RBC ratio, we feel secure as we are much healthier than our operating target of approximately 400%, and that remains unchanged. During the first quarter, the market dynamics evolved, which is reflected in our sensitivities, particularly in the plus or minus 10%, which has returned to a more typical state. No actions have been taken yet, but we will keep monitoring the situation. If we determine that action is needed and it can be executed at a low cost, we will certainly consider it.

Michael Huttner, Analyst

I have a couple of questions. One is regarding the operating capital generation for 2025, and the other concerns the cost of hedging. Based on the guidance, I calculated around 1,220, which comes from 320 multiplied by three plus Q1. However, there is seasonality in mortality, as you've indicated in the slide. Therefore, the numbers might be closer to 1,250 or 1,260. Are you cautious because you're uncertain about the reasons behind the worse U.S. mortality in Q1, and if this could be a trend going forward? Or is this simply a matter of normal conservatism? Additionally, regarding the RBC hedging costs, these are clearly not part of the operating capital generation. I am asking where the extra hedging costs you mentioned, which could have a single-digit impact on RBC in Q2, will be reflected.

Duncan Russell, CFO

Michael, so the latter one is easy, that's considered markets for us because it's driven by market movements. And so we put that in non-OCG and you'll see it just in the movement of the RBC. So when we starting RBC plus OCG plus market impacts.

Michael Huttner, Analyst

But may I just interrupt, it is your decision to buy more hedging. That is not a market impact if you buy more hedging, is it?

Duncan Russell, CFO

No, I don't think that's what happened to be honest. We have exposures that we hedge and immunize, particularly most market exposures on our variable annuity book. We don't typically hedge out. We also have a fixed implied volatility assumption in the pricing of our guarantees. The simplest way to understand this is that when actual volatility exceeds what we have priced in our valuation, it creates a drag that we don't hedge out. We can adjust our hedge positions on a day-to-day basis but, generally speaking, we do not hedge that out. This drag was visible in April when intraday volatility was quite extreme. There hasn't been any change in our hedging strategy this quarter. Regarding your second question about OCG, the guidance is for around €1.2 billion, which aligns with the figures you mentioned. Thus, it's consistent with our guidance. While there may be quarterly volatility, we are aiming for around €1.2 billion.

Michael Huttner, Analyst

In my question, I was asking how you view U.S. mortality considering the older age variance in Q1. Have you altered your perspective on this, or do you consider it just normal volatility?

Duncan Russell, CFO

We have not changed our view. The best way I assess it is by comparing our actual IFRS figures to estimates and expected mortality variances. We had a positive half year last year, and I mentioned on the call that it was two positive quarters. This quarter, we've observed elevated mortality, primarily due to higher frequency among older age groups in our financial assets. It's not surprising to see quarterly volatility given the scale of the numbers involved. Therefore, it doesn't surprise me, and I don't see any reason to adjust our perspective based on what we’ve observed since updating our assumptions in the second quarter of last year.

Yves Cormier, Head of Investor Relations

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