Earnings Call Transcript
AEGON LTD. (AEG)
Earnings Call Transcript - AEG Q2 2020
Operator, Operator
Good day, and welcome to the Aegon First Half Year 2020 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jan Willem Weidema. Please go ahead, sir.
Jan Willem Weidema, Speaker
Thank you, sir. Good morning, everyone, and thank you for joining this conference call on Aegon's first half 2020 results. We would appreciate it if you could take a moment to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. It is with great pleasure that I welcome our new CEO, Lard Friese, for his first results conference call at Aegon. Also with me is our CFO, Matt Rider, who will take you through the financials. At the end of the presentation, we will, of course, leave more than sufficient time for your questions. Let me now hand it back to Lard.
Lard Friese, CEO
Yes. Thanks, Jan Willem, and good morning, everyone. Thank you for joining us on today's call. In my part of the presentation, I would like to provide my initial views on the company and the road ahead after three months in the job as Aegon's new CEO. I will then hand over to Matt, who will take you through our first half 2020 results. Before we start with that, I will share with you how the COVID-19 pandemic has impacted Aegon and its customers and what our response has been. So let's move to Slide 2. As you can see on Slide 2, underlying earnings for the group were down by 31% to €700 million. Higher mortality rates, in part due to COVID-19, and lower interest rates had a significant adverse impact on our U.S. business. Earnings in our other businesses held up well, supported by lower expenses. Net income was impacted by a charge related to our assumption review in the U.S., among others, to reflect the significant drop in interest rates in the past year. From a commercial perspective, the lockdowns in response to the pandemic have been a challenge, and particularly for our agency sales channels, which led to lower life sales. In response, we are actively managing our product portfolio and increasingly doing business virtually to serve our customers. We have, for instance, expanded on nonmedical underwriting limits in the U.S. Life business due to difficulties for paramedical examinations that take place. We have been able to do so by leveraging our existing capabilities in automated underwriting in lower face value policies and are now using predictive data sources in our underwriting process for policies with up to $2 million face value and in selected risk classes. This supported sales in our key distribution channel for the U.S. Life business, World Financial Group. Digital business models, such as our e-commerce partnership in China, are doing well in the current conditions. Our mortgage business in the Netherlands also continued to perform very well, while delivering a record-high level of mortgage production of over €5 billion, thanks to the highly automated nature of this business. In several of our deposit businesses, including the U.K. platform, we saw increased retention rates. Furthermore, we again achieved net deposits from external third parties and asset management, which add to Aegon's track record of eight consecutive years of net deposits. Together with net deposits in our online bank, Knab, this led to positive net deposits of €1 billion. From an operational perspective, we have dealt well with the fallout of the pandemic. Our service to customers has continued at a high level. In some areas, we even realized the highest customer satisfaction scores ever as we adapted successfully to servicing customers virtually and have supported our customers and business partners. I am very proud of our employees, who really delivered and have demonstrated their commitment to customer service in these extraordinary times. Let's now move to Slide #3. Let me turn to my initial views after three months as Aegon's CEO. It is my ambition and that of my management team to transform Aegon into a more focused, high-performing group with a balanced portfolio of businesses that is generating reliable free cash flows and delivering sustainable and attractive shareholder returns. This is not where the company is today and it will take time to get there. In summary, there are four areas of focus that I believe will contribute to making Aegon a materially better, more enduring and profitable company in the coming months and years. These are the following: number one, strengthening the balance sheet; number two, creating a more disciplined management culture; number three, improving efficiency; and number four, increasing our strategic focus. So let me take you through the four areas one by one, starting with strengthening of the balance sheet. Aegon’s capital position is, overall, satisfactory, as demonstrated by our Solvency II and RBC ratios. However, significant uncertainty remains on what the economic impact of the COVID-19 pandemic will be going forward. And we expect continued adverse mortality experience in the second half of 2020, as the number of daily infections in the U.S. remains high. This contributed to our decision to let our U.S. business retain their second half remittance to the group to strengthen their balance sheet. In addition, we believe that our leverage and the volatility of our capital ratios are too high. We will therefore take action to strengthen the balance sheet, bring down leverage, and improve the company’s risk profile to reduce volatility. This should lead to more consistent remittances to the group. These remittances should be based on recurring capital generation rather than one-time free cash flows as a result of management actions. In this context, we announce today several steps to strengthen our balance sheet, but more will follow. The first is that we have decided to retain the final dividend for 2019. The second is that we are reducing the interim dividend from a level of €0.15 per share last year to €0.06 for 2020. We anticipate that free cash flows are sufficient to cover the rebased dividend, even in reasonable stress scenarios. From here, dividends and other means of capital return to our shareholders will be based on a regular assessment of the company’s financials, according to customary governance. At our upcoming Capital Markets Day in December, we will provide more detail on the outlook for future dividends.
Matt Rider, CFO
Thank you, Lard. On the next couple of pages, I will take you through the main elements of our financial results for the first half of 2020. Let me start with IFRS earnings on Slide 6. In the first half of 2020, underlying earnings were €700 million and decreased 31% compared to the same period last year. Earnings were impacted by adverse mortality and lower interest rates in the United States. The U.S. Life business reported €150 million of adverse mortality experience. Of this amount, we could specifically attribute €34 million to COVID-19 as a direct cause of death. However, we believe that a part of the remaining adverse mortality experience is likely also attributable to the pandemic. Furthermore, low interest rates and changes in the asset portfolio drove unfavorable intangible adjustments of €97 million also in the Life business. This was partly offset by €55 million of favorable morbidity experience health. Somewhat more than half of this is from the closed block in Long-Term Care, where higher mortality led to an increase in claims terminations. Other health insurance products benefited from lower claims, as a result of reduced nonessential medical procedures due to the lockdowns that were imposed. Earnings in the U.S. retirement plans and Variable Annuities businesses were under pressure from outflows as well as from investments in technology to improve the customer experience. Earnings in the Netherlands were resilient. The change in the treatment of underwriting results -- underlying earnings and costs related to the longevity reinsurance deal we announced last year were almost fully offset by lower expenses. In United Kingdom and Asset Management, lower expenses and growing fee income contributed to an increase in earnings. Earnings from Aegon International increased, driven by fewer health insurance claims in Spain and Portugal, because of the pandemic-related lockdowns. Next to underlying earnings. Fair value items contributed positively to net income. This was mainly driven by the Netherlands due to a reduction in the value of liabilities, as a result of wider credit spreads. This was partly offset by fair value losses in the U.S., mainly from the reduced value of investments and unhedged risks, while the hedges were effective for the targeted risks. Other charges amounted to €1.1 billion. The lion's share of that is from assumption updates in the U.S., which I will explain in more detail on the next slide. As part of our regular processes, we review assumptions for the Americas in the first half of the year. This half-year, we have implemented substantial updates for key assumptions in our U.S. business. Given the decreasing interest rates in the United States, we have lowered our long-term interest rate assumption from 4.25% to 2.75% and have lowered the assumptions for separate account bond fund returns accordingly. This 150 basis point decrease in the long-term interest rate assumption led to a total pretax charge of €473 million. The updated assumption implies that we are assuming a reinvestment yield, including credit spread of approximately 4% in 2030, which compares to the current quarter reinvestment yield of 3.2%. Secondly, we have strengthened our Life reserves by updating our assumptions for premium persistency and mortality, leading to a pretax charge of €234 million. We will continue to monitor claims experience and its drivers closely, including COVID-19, which led to adverse experience in the first half of this year. Thirdly, we have reviewed the Long-Term Care assumptions. Despite evidence of morbidity improvement and our favorable overall LTC claims experience, we have decided to move to a more conservative assumption. We have reduced the morbidity improvement assumption from 1.5% to 0.75% annually over the next 15 years. This led to a pretax charge of about €81 million. Let us now switch focus to capital on Slide 8. Here, you can see that the Solvency II ratio for the group has decreased slightly to 195%. This leaves the ratio still at the top end of the target range of 200%. Expected return net of new business stream had a contribution of 9 percentage points, which was more than offset by market movements of minus 18 percentage points. Model and update -- or model and assumption changes had, on balance, a negative impact of 2 percentage points on the group's solvency ratio. This included the lowering of the ultimate forward rate in the Netherlands and assumption updates in the U.S. Lastly, one-time items had a positive impact of 5 percentage points on balance, as management actions more than offset adverse mortality in the U.S.
Lard Friese, CEO
Thank you, Matt. Let's move to Slide #14. Let me round up by underscoring once more, that it is my ambition and that of my management team, to transform Aegon into a more focused, high-performing group with a balanced portfolio of businesses that is generating reliable free cash flows and delivering sustainable and attractive shareholder returns. We are focusing on four areas to achieve this ambition: number one, strengthening the balance sheet; number two, creating a more disciplined management culture; number three, improving efficiency; and number four, increasing our strategic focus. I would like to open the call now for your questions. And in the interest of time, I kindly request you to limit yourself to two questions, so that everybody gets a chance to speak. So operator, please open the Q&A session.
Operator, Operator
[Operator Instructions] And we'll now take our first question from Farooq Hanif of Crédit Suisse.
Farooq Hanif, Analyst
Just two questions, as you said. Firstly, when you talk about countries and focus, I just want to understand a little bit what's on the table and what might be off the table. So an obvious question is the structure of the group with a U.S. focused business with a totally different capital regime, maybe a bigger impact from IFRS. Is it on the table that you look at the actual -- a breakup of the group? That's question one. Question two on deleveraging. I mean you've talked about the €500 million of senior notes. What kind of metrics are you looking at? Where do you want to get to ultimately on leverage?
Lard Friese, CEO
Yes. So Farooq, I suggest that I'd take the first one, and then maybe you can take the second one, Matt. So the first one. What I've said today is that if I look at the total composition of the group, we are present in 20 countries. And I believe that the group can benefit from more strategic focus, and we need to take very disciplined capital management decisions and portfolio decisions. And at the Capital Markets Day, we're still working through our thinking there, the Capital Markets Day will give you a framework on how to think about that. When it comes to the U.S. and other markets, which I mentioned, I mean, the U.S. is a vast, very big large market for us. It's an established market, like the U.K. is, like the Netherlands is. We have a good brand there. We have a broad set of products there. We have multiple business lines in the U.S. And I believe that with a renewed focus on performance, on improving the commercial momentum and driving profitable sales, I think the U.S. market for Aegon has a great opportunity to create a lot of value. Just like, I said -- I was talking about the U.K., the Netherlands, the asset management business in Spain and Portugal, the relationship we have with Santander and also developing markets, large developing markets for the future -- for future growth like China and Brazil. However, I did say we have 20 countries. And the question is, how do you create more strategic focus to the group to ensure that you can create longer-term the -- create more value for stockholders over time.
Matt Rider, CFO
Farooq, with respect to the leverage ratio, I think the analysis behind that is really still taking place. When we have guided you today to the fact that we are going to take out €500 million of debt in December, we're indicating really a direction of travel here. We definitely want to reduce the risk profile of Aegon, and we do want to reduce financial leverage. However, the precise implications for things like the leverage ratio target or other aspects of our capital policy are really still being worked through. So we would intend to update you in the Capital Markets Day in December.
Farooq Hanif, Analyst
So just to come back on the scope of the group. My interpretation of what you said is, look, it's not an immediate priority to split up the U.S. or list it, but you are looking at the number of countries you're in the focus. Is that a correct interpretation?
Lard Friese, CEO
I believe we need -- I'm sitting here for the long-term value creation of the group for stockholders. And I think it's in the best interest of stockholders to continue the activities I just outlined because I believe there's a lot of value to be created there. At the same time, I'm saying that we're in 20 countries. And therefore, we need more strategic focus. I think the group can benefit from that. And we're working through that, and we'll give you more clarity on the framework and portfolio decision framework that we're going to take at the end of this year on the Capital Markets Day.
Cor Kluis, Analyst
Cor Kluis, ABN AMRO. I got a couple of questions. First of all, about the assumption review, you did the review of the Americas, of course, in the first half of the year. And it's good that you aligned some of these assumptions well. Question is more about Europe and Asia, also an assumption review there going in the second half of the year. Could you comment a little bit on that and might be expect at Q4 results? Or might it also be happen at the -- happening at the Capital Markets Day? And what are the items you're really looking at? So that's on that side. And secondly, on the U.S., maybe a question for Lard. Question is, of course, physically, a little bit more of a challenge for you to look and analyze the U.S. business in the first half of year. But could you give your comments and views what you've learned and especially on items like Long-Term Care and Variable Annuity business? What's your view on that part of the U.S. business as well? That were my questions.
Lard Friese, CEO
Thank you very much, Cor. On the assumption updates, Matt, maybe and then shall I start first with the impressions for the U.S. Yes. So indeed, I've started in the middle of the pandemic. So I was supposed to be in the U.S. for quite a long time, actually, and only was physically there for a week, after which I had to return back because of the travel restrictions that were imposed at that time. But I have been able to conduct many, many, many meetings with our colleagues in the U.S. and to get myself familiar with U.S. products and with the U.S. business. We have to -- we wanted to remind you, first, we have changed the organizational structure of the group to really focus more on two distinct areas. One is the Workplace Solutions business, that is retirement business, retirement plans and employee benefits and the like and voluntary benefits. And then we have another division setup, which we call Individual Solutions. And that's the business that basically sells the annuity business, but also final expense, term life, whole life, and universal life products. We have also decided to appoint two new CEOs in those two business lines. So the two business lines there now have new CEOs, very talented leaders that have been appointed there to ensure that we drive the performance and the commercial momentum of the company. If I look at the product portfolio, of course, with these low rates, we need to be realistic that the living benefit in the Variable Annuity book is, obviously, something which is quite under pressure in terms of profitability, while still maintaining a good consumer outcomes. And as a result, we have adapted the product range in May, and we are going to continue to navigate through the product portfolio in the annuity business to ensure that we redesign products, develop new products, for instance -- and focus on sales efforts, for instance, more on fixed index annuities.
Matt Rider, CFO
Thanks, Cor. With respect to the assumption review, the first half assumption review, as we've said, is taking care of the U.S., also Transamerica Life Bermuda, the high net-worth business that we have in Asia. Now we normally do the European assumption review in the second half of the year. And it's really critically important that we take the same diligent review of the process that we did for the U.S. in the first half, also taking into account the concerns of the market. So with respect to when would we announce something, I think it would be unlikely that we would say anything about assumption review in Europe for the Capital Markets Day in December. I think that would be something for the year-end earnings release.
Michael Huttner, Analyst
I just wanted to -- on the cash at year-end, whether you could talk me through the moving half. I heard the figures, but really I was typing at the same time, not focusing, minus €550 million, which is the dividend and holding costs, minus €141 million for Santander, and I guess, minus €455 million for the debt repayment. So trying to deduct that from the €1.7 billion, I get to a €0.6 billion, and you said you'd be at the bottom end of the range, €1 billion. So if you could help me on that will be lovely. And then second, your new colleague, is a fantastic guy. What I remember most of him is his key question is always what is the number of shares. In other words, the potential dilution to come from capital increase. And I just wondered if you can explain a little bit your thinking on that. And here, I alluded to the fact that you did have a registration statement. I was sure that's kind of normal events in July. But that registration statement does have the possibility of issuing shares and when can that be?
Lard Friese, CEO
I understand the question. Well, first of all, on the filing that you're referring to, the Form 3, that's actually something quite boring, to be honest. We regularly issue dollar paper in the U.S. market. Last year, for instance, we issued a USD 925 million Q2 instrument under the shelf program. This is just a program that we need to maintain and perform a yearly update of a registration document. So it's actually quite a boring thing. About your other point, can I just point out to you that -- to remind you that today, we're announcing a dividend actually, and that we're also saying that we want to prioritize repaying debt. And actually, that at the end of the year, we're going to repay €500 million of debt. I mean that to me is a clear answer to do you have any plans at this point for this? The answer is no. I mean, we're announcing a dividend and also prioritizing deleveraging.
Matt Rider, CFO
With respect to excess cash at the holding, I'll begin with a beginning year balance. So we had about €1.2 billion excess cash in the holding at the beginning of the year. We will expect about €830 million of gross remittances from the various business units throughout the year, and that would be for the entire year, take out about €300 million of holding and funding expenses. And then the key points on the other pieces here, we should get the proceeds from the divestment of our Japan business, so that's about €150 million. We also expect about €250 million of capital injections into the business units, which are -- which include the funding of the Santander expansion. We have about €120 million in common share dividends based on the €0.06 per share that we've announced today. And then the change in the financial leverage is that USD 500 million senior, and that gets you to something over €1 billion in the holding excess cash at the end of the year.
Farquhar Murray, Analyst
Just two questions, if I may. Firstly, on the dividend rebase, you seem to have rebased to a level that you can sustain against closable stress outcomes. But could you just outline what needs to happen for Aegon to move higher from those levels? Is that just a matter of moving beyond the, kind of, COVID-19 uncertainties? Or are we looking at a more sustained recovery in U.S. remittances, might actually take for 2022? . And then secondly, on the assumption changes, please, could you quantify the reductions in the headroom you referred to on the asset adequacy and premium deficiency reserves? And can you just update us on where you stand on those currently?
Lard Friese, CEO
Thank you, Farquhar. I will take the first question, and Matt, you are taking the second. Okay? So on your trajectory question for the dividend, as I said during my opening remarks, we realized that we should, over time -- this business should, over time, be able to produce more than the current level of dividend. But for now, we feel this is the right level of dividend, as we want to prioritize deleveraging, we want to strengthen the balance sheet and we want to indeed navigate well through the COVID-19 pandemic. We're working on plans to improve the operating performance of the company, and with that, over time, to increase the free cash flows of the company. And now provided we're successful in executing those plans in the coming years, that will put the entire business into a place where it can produce higher levels of capital return from dividends and buybacks, for instance. But more details will come later on this.
Matt Rider, CFO
With respect -- let's say, with respect to cash flow testing, headroom and PDR headroom, just in general, on asset adequacy testing, this is -- it's an annual test that we run at the end of the year. We have done a number of legal entity restructurings in the U.S. over the past several years, and this has helped us to improve our capital ratio and get some additional cash flow testing sufficiency. We also have additional legal entity mergers. We've talked about this before, the merger of TLIC and TPLIC that is scheduled to happen on October 1st of this year. We are also co-opting an embedded value captive reinsurance company at the same time. And at that moment, we further plan to optimize the legal entity structure in the U.S. All of these things are things that benefit the cash flow testing sufficiency. However, the assumption changes that we have made in the first half of the year have eroded to a certain extent. But at the level of interest rates that we're currently at, we do not expect to have to put up additional cash flow testing reserves at the end of the year, again, assuming that we get the TLIC, TPLIC legal entity merger completed by the end of the year. With respect to the premium deficiency reserve testing, again, this is an annual test and that’s when where we're going to be close. Do you need to -- so once the cash flow testing runs, taking into account the legal entity merger. So we're going to wait until year-end to talk about that.
Ashik Musaddi, Analyst
I have two, three questions. So first of all, I mean, we are in an interest rate environment, which I would say we haven't seen in past in U.S. So how confident you are that the current interest rate is now fully reflected in the stat accounts? I mean I'm not very much keen on the IFRS, but in terms of stat accounts, do you think that if interest rates remain here for 5 years, 10 years, especially the U.S. one, you will not be taking charges in the future on interest rates, at least in the stat account? So that's the first question I had. Second question. You keep on mentioning that you want to reduce the risk profile of the company. What does that mean apart from deleveraging? I mean, do you plan to reduce the credit risk? Do you plan to take interest rate hedges? So any thoughts on that would be very helpful. And thirdly, is I mean, how should we think about cash flows -- cash, say, capital generation at the moment in light of new interest rate environment in U.S. and in Dutch businesses? I mean, in past, I think U.S. capital generation was about $900 million and Dutch capital generation was about $300 million, $350 million. But because of falling interest rates, because of your reduction in this profile that you're talking about, how should we think about that normalized cash generation profile going forward? I'm just trying to get a bit of sense as to what sort of free cash flow you can generate in the long run?
Lard Friese, CEO
Yes. Thank you very much, Ashik, for your questions. I'll take the question that you directed me about the risk profile of the company. And Matt, I'll look for the other questions to you if you don't mind. So on that. Yes, the way -- I'm not going to give any specifics at this point, but if you take a step back, what I'm trying to do is the following. If I look at the company, I think the performance really needs to improve, the operating performance. Secondly, and for that, a number of things need to happen. I need to install a different management culture, creating a high-performance environment and ensure that we are creating -- where we're getting free cash flow generation that moves up as a result of better management activity, if you will. So that's number one. Number two, I also see a lot of volatility. You see volatility in capital ratios, but it also -- the entire picture, in my view, creates a lot of volatility, which I want to just make more boring, if you will, maybe a weird word for this. But I think I want to create a much more quiet picture, if you will, and that's part of the effort that we're going to do. The other thing is that, yes, today, we've announced a couple of things around the balance sheet because we really want to ensure that we take a step back, rebase the dividend, create room to delever the company and also to take actions to ensure that the overall profile of the group becomes more predictable over time and focused on generating free cash flow through high-performance management activity in the markets where we operate and further, of course, reducing, if you will, the strategic focus, ensuring that you create more strategic focus, if you will, for the group as a whole. That's what I aim to achieve there. With that, Matt, over to you.
Matt Rider, CFO
With respect to the impact of, sort of, the low interest rate environment on capital generation in the U.S., what we said before and still holds true today is that we reinvest about $5 billion worth of our general account. We have to reinvest that every year. And to the extent that you have a gap between your -- let's say, your new money yield and your back book yield, that's going to create a drag. And right now, that drag is standing at about 109 basis points for the U.S. general account portfolio. So just in general, call it, 100 basis points, you're talking about a €50 million reduction in pretax earnings, capital generation, all sort of the same thing. But then if the next year, that level of interest rates persist, then it compounds because you've got another €5 billion that you have to reinvest. So €50 million goes to €100 million, goes to €150 million and so on. So a prolonged low interest rate environment creates a drag on our earnings. I would also say that it's not just in the U.S., we do have a sensitivity to interest rates within the Netherlands. And there, if you have a 1 basis point drop in interest rates, you end up with about a €1.5 million annual impact on capital generation going forward. And just to remind you, we do have a quite a significant UFR drag that's going on in the Netherlands, it stands at about €275 million annualized today. But that's just a reflection of where interest rates have come. But low interest rate environment is very difficult for us. And it's one of the reasons why we are being cautious here in rebasing the dividend to that €0.06 a share so that we can make sure that it's well covered by cash flows out of the businesses, even assuming a reasonable level of adverse scenario.
William Hawkins, Analyst
Matt, what you were just saying to Ashik is partly answered. I was also going to ask about the capital generation. So I don't want to ask the same question again, but I'm just trying to get clear in my mind. Your €4.1 billion 3-year target, I mean that was an anchor point for Aegon. And I can see why you've to adjust your cash and leverage use, but to me it's a little bit more fundamental that you seem to massively have eroded back from that number. So just to be clear, we seem to be annualizing now at below €1 billion and the direction of travel for that number is still negative. And I just wanted to sort of make sure I'm clear. The driver of that very rapid deterioration is the UFR drag that you mentioned and then the ongoing rollover risk in America. So I suppose if I'm right about the question I wanted to ask. You made a couple of references. I think Lard made a couple of references to management actions also boosting figures. And you've not really talked about that so much in the past. And so I wanted to check, have management's actions also been boosting your historical normalized capital generation figures in a way we haven't seen? And if so, by how much, or is that comment about management's actions more just referring to the dividend upstreams and the rest of it? And then secondly, Lard, I'm sorry to come back to this point about rationalizing the 20 regions. But I mean just as a comment I'd like you to respond to. I respect what you're saying on that, but the 3 big regions, which you seem pretty committed to even before we get on to asset management, they're generating more than 95% of your operating earnings and capital generation. So it would seem to me that anything that you do in the other 15 to 17 regions is really going to be marginal to Aegon's position. And so what I just wanted to check with you is, am I missing the point on that? Do you actually think that there's stuff you can do in these smaller regions that can actually become financially material for Aegon? Or is this more just about maybe quite reasonably, just wanting to reduce your distractions? You've got 3 big operations that you need to focus on. And you don't need to be focusing on all these other areas. And so even if they're financially relevant, you need to get them off the table so that you can really focus on the stuff that matters?
Lard Friese, CEO
Yes, Will. Let take that first, Matt, and then the last piece first. I understand your questioning. Yes, you're right. I mean, I think we should limit our distractions, let's be perfectly clear and focus our efforts on where it matters. And that's what I think the real important message just that we're trying to get across today. On what strategic focus, I mean, do not be distracted and focus on things that move the needle and really and surely to drive your performance up and get better and stronger streams of free cash flows, which will provide all kinds of opportunities for capital returns and other purposes. So that's a large piece of this. And more focus also on markets, management time, attention, et cetera, makes your company with a hop in your step, and that's what we need to come. Matt, with that.
Matt Rider, CFO
With respect to the capital generation target, you're absolutely right. I mean when we set out the 2019 to 2021 targets, we really anchored on that €4.1 billion of normalized capital generation. And that was really supported by effectively remittances from the U.S. and that's sort of a shorthand of saying that we talk about our payout ratio on normalized cap gen. But really, it was anchored by normalized capital generation in the U.S. and the level of remittances that they were going to be able to pay to the group. But again, we are not in a normal situation here. So normalized capital generation is going to be eroded by things like credit defaults, things like additional mortality. So that's really why we have to back away. That's really the reason why we have to back away from that target.
Fulin Liang, Analyst
I've got two questions. The first one is just wonder how are you going to protects your U.S. RBC ratio because if you look at the RBC ratio right now, it is above your bottom range of the target range of €350 million. But if -- when I look at the credit migration and defaults, you implied it not picked yet and also your portfolio is not completely new to equity market movement. So €386 million versus €350 million, it doesn't sound a bit of a much margin to me. So I just wanted to see if the market actually deteriorates from here what would -- could be the management actions to protect your U.S. RBC ratio? So that's the first one. Second one, I think the question being kind of asked before, just want to follow up. On the point of improving the company's risk profile, could you add some color, specifically, on the liability risk profile? What do you like, what you don't like, for example, do you like longevity risk? Do you like more fraud risk? Do you like the [indiscernible].
Lard Friese, CEO
Thank you for your questions. Let me take the last question, and then I'm asking Matt to take the first one on the RBC ratio. Fulin, as I said earlier to Ashik, on the call, I'm not going to go into specifics at this point. What I just aim to do is create a situation where the company comes -- volatility is addressed, where debt is taken down, where the overall trajectory of the company is driven by management performance and activity to drive efficiency up, to drive commercial momentum up, to focus strategically on markets that we think we can create a lot of value in the future, that we focus our attention in a very granular manner on the activities that we can undertake to improve the overall free cash flow trajectory for the company. And those are the key things that I would like to highlight here. More to come on this because I understand you have questions on this, but more to come on this, but give me a bit of time to be more granular about this, likely more by the end of the year. So Matt, the RBC?
Matt Rider, CFO
With respect to protecting the U.S. RBC ratio. So to be clear, even -- again, even in a COVID environment, we feel comfortable enough with the solvency ratio in the U.S. to be able to take out a €450 million dividend out of the Life companies in the second half of the year. So that gives you a bit of a measure of even under a reasonable set of adverse scenarios, we still think that it will be possible to take out that €450 million. So -- but let's say -- and again, that's just assuming lower level of equity markets continued and even higher credit defaults and credit migration, the continued low level of interest rates, mortality experience definitely negatively impacted by COVID-19. But if it was significantly even worse than what our expectations would be, probably the management action that we would take is that we would have to reduce that remittance somewhat out of the U.S. Life companies in the first half of the year. We do want to -- we definitely want to protect the ratio. But given the sensitivity analysis and the scenarios that we run, we still feel comfortable that we'll be able to take out that €450 million and still maintain the U.S. RBC ratio at an adequate level.
Andrew Baker, Analyst
Just one from me. Are you able to provide an update on your U.S. mortality experience you've seen in the second half so far? And what are you kind of assuming for year-end?
Matt Rider, CFO
We do have July experience, and it looked to be actually lower than what we had seen in the first half of the year. We see actually a lower number of claims and the -- but the average size of claims is actually reduced at this point in time. But we are definitely not out of the woods yet. I mean COVID-19 -- and if you look at the deaths and the way that, that is tracking, so actually in the U.S., death rates are -- for COVID-19 direct causes have actually come down since April when they were peaking. But on the other side of the coin, we're getting infection rates back up. So it's very difficult to talk about what is the impact of additional mortality for the balance of the year. But yes, July was, I would say, a bit encouraging.
Benoit Petrarque, Analyst
So two questions on my side. The first one is coming back on this priority of strengthening the balance sheet. Obviously, you started to implement more conservatism on the balance sheet with assumption changes. Are you done there? Or do we need to expect still big assumption change in the second part of the year? I was trying to figure out if the leverage ratio of 28.4% is a kind of clean starting point for us to calculate the kind of required deleveraging going forward? And then the second one is on the Dutch Solvency II ratio and coming back on this issue of volatility. I mean, how do you see the ratio today? What is the kind of the true level? And how do you want to address this volatility? Will you consider the cash injection in the Netherlands? Or just trying to figure out what is the dividend also capacity of the Dutch business as we speak? And also trying to figure out if you are still comfortable with the re-risking plan there?
Matt Rider, CFO
With respect to the leverage ratio, yes, you say is the 28.4% where we currently are, is that a clean starting point. I think I mentioned earlier that this is one that we really want to revisit together with other elements of our capital policy. We will come back to you at the Investor Day in December to talk about this. But again, the €500 million that we do today is indicating a direction of travel. There may be additional deleveraging that we want to do. We also have to address quality of capital, which we will do at the Investor Day. With respect to the Dutch Solvency II ratio, is that a sort of a normal number? You basically look at the EIOPA VA and you say whether that's normal or not. So at the end of the first half of the year, it was standing at 19 basis points. If that comes down, then we're really going to erode it. What's the average of the VA over time, probably 13, 14 basis points, something in that space. So maybe relative to a long-run average. Whatever that is, we're a little bit high. But as Lard mentioned, the issue in the Dutch business is really -- it's really the volatility of the capital. So it's not going to result in us injecting -- we're not going to inject cash into the U.S. business to solve fundamentally a volatility problem, not a level problem. We have a volatility problem, first and foremost. So part of the EIOPA review for 2020 is in part addressing the issue that we have with basis risk for the EIOPA VA relative to our portfolio, we are continuing to engage with our own regulator, the Dutch Central Bank. We are engaging with EIOPA to see if that can be fixed. That would be the primary mechanism we are doing, that we could manage that volatility. But again, we are working with the Dutch Central bank. It is a mechanical problem that is part of Solvency II, not an economic problem, and we want to solve it in that manner. It will not result in an injection of cash in the Netherlands.
Steven Haywood, Analyst
You've talked a lot about, obviously, deleveraging and review of your businesses. And obviously, there'll be cash coming up with the deleveraging. But have you thought about any acquisitions going forward in the markets that you consider strategic? I assume that increasing diversification will help lower -- the volatility of Solvency II ratios that is there for businesses. Whether are there any thoughts about M&A in the future at all? And then secondly, just a quick question on your dividend. Are you still going to assume a broadly 50-50 split between the interim and the final?
Lard Friese, CEO
Yes, Steven, I'll take your question. Yes, I get your point about diversification. But let's say, acquisitions are at this point, not a primary view for us. Secondly, the point about the dividend. Yes, so the interim dividend is €0.06, as you know. Usually, a final year dividend for 2020, you take a decision on that when the year is over and when the year is behind June. We're now half in the year. So I think it's a bit early to talk about decisions there. But if you look at our past behavior, our historic pattern of this, usually, the interim dividend represents 50% of the full year dividend over the end of the year. And that is something for 2020 can be seen as a guidance for that. But we'll take the decisions, obviously, when the year is over.
Jan Willem Weidema, Speaker
That concludes today's conference call. Thank you for your time and interest in Aegon. Look forward to engaging with you in the future.
Lard Friese, CEO
Yes. Thank you very much, everybody, for being on the call and for all your questions. Have a good day.
Operator, Operator
This concludes today's call. Thank you for your participation. You may now disconnect.