ASR Nederland N.V. (AGN) Earnings Call Transcript & Summary

Good day, and welcome to Aegon combine its Dutch operations with a.s.r. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Jan Willem Weidema, Head of Investor Relations, to begin the conference. Jan, over to you.

Thank you, operator. Good morning, everyone. Welcome to the Aegon conference call for analysts and Investors on the combination of Aegon's Dutch business with a.s.r. Before handing this call over to Lard Friese, CEO of Aegon, I would like to ask you to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. Furthermore, I would like to remind you that we are in a close period in relation to our third quarter 2022 results. After a brief presentation, Lard will be joined by our CFO, Matt Rider; and our Chief Transformation Officer, Duncan Russell, for the Q&A session. Let me now give the floor to Lard.

Yes. Thanks, Jan Willem, and good morning, everyone. Thank you for joining us on today's call. This morning, we announced an agreement to combine our Dutch pension life and nonlife insurance banking and mortgage origination activities with a.s.r. Upon completion of the transaction, we will receive a 29.99% stake in a.s.r. and EUR 2.5 billion in cash. This is a strategically and financially compelling transaction. By combining our Dutch business with a.s.r., we will create a leader in the Dutch insurance market that will be well placed to serve its current and future customers. This transaction is a catalyst that accelerates our strategy to release capital from our mature businesses and reinvest it in markets where we are well positioned for growth. We believe that the transaction will create value for our shareholders and all other stakeholders. We will benefit from substantial synergies through our stake in a.s.r., and we intend to use the majority of the cash proceeds to return capital to shareholders. In aggregate, we expect this to result in an accretion of our free cash flow per share over time. At our Capital Markets Day in December 2020, we outlined how we wanted to transform Aegon in order to change our performance trajectory and achieve better results. Since then, we have increased the speed of decision-making and delivered on our commitments. The improvements that we have made in our performance, together with the transaction we announced today, allow us to increase our payout ratio and rebase the targeted dividend per share over 2023 from around EUR 0.25 to around EUR 0.30. Turning to Slide 3. The rationale to combine our Dutch activities with a.s.r. is compelling. Combining our companies will benefit all our stakeholders. Both Aegon and a.s.r. are deeply rooted in Dutch society and share a long and rich history. Customers and distribution partners of both companies will benefit from a competitive product offering and improved service levels. Employees of the combination will benefit from greater long-term career opportunities within a larger and more diversified Dutch company. The combination will be the #2 insurance company in the Netherlands, with significant scale across different segments. It will have a leading position in the Dutch pension market, and the combination is well placed to capture the opportunities from the upcoming pension reform, leveraging the expertise of Aegon in the Netherlands. Combining the 2 companies will result in a strong player in the nonlife space, with leading positions in both Disability and Property & Casualty segments. This underscores that this is a highly complementary transaction. As this is in-market consolidation, we expect significant revenue, cost and capital synergies. Combining our businesses will lead to enhanced scale in the origination and servicing of Dutch mortgages and stronger distribution activities. What's more, the integration of the 2 closed individual life portfolios onto 1 platform will enable these books to be run more efficiently. Finally, Aegon will bring to a.s.r. significant risk management capabilities and accelerate the implementation of a partial internal model for the combination. As part of the transaction, we have entered into a long-term asset management contract with a.s.r.. Aegon Asset Management will manage illiquid assets that are part of the combination's general account, the investments of the Aegon Capital, our premium pension institution, and a.s.r.'s mortgage funds. This agreement is earnings accretive for Aegon Asset Management and strengthens our position as a provider of fiduciary services, retirement multiasset solutions, fixed income and responsible investing. Let's now turn to Slide 4. Upon closing of the transaction, we will become a large minority shareholder in a.s.r., with almost 30% of the shares, irrespective of any equity offering by a.s.r. to finance transaction. This strategic shareholding in a.s.r. enables us to participate in the benefits that the combination will bring. And in addition, the gross cash proceeds amount to EUR 2.5 billion. Given our significant interest in the combination, we have agreed with a.s.r. on certain governance rights. We will have the right to nominate 2 candidates for a.s.r. Supervisory Board, 1 independent and 1 nonindependent. Subject to approval by a.s.r. shareholders, and of course, the approvals of our regulators, I will join the Supervisory Board as a nonindependent member and have an affirmative vote on certain topics, reflecting the size of Aegon shareholding. When we turn to Slide 5, you can see how we plan to deploy the cash proceeds. Our intention is to return EUR 1.5 billion of capital to shareholders. We will maintain a strong balance sheet and plan to use up to EUR 700 million to reduce our leverage. Post the transaction, capital return and deleveraging, we expect cash capital at the holding to be around the top end of our operating range of EUR 0.5 billion to EUR 1.5 billion. In the near term, we expect to maintain cash capital at the holding in the upper half of the operating range. This will allow us to fund management actions to further improve our risk return profile as well as initiatives to drive additional sales growth, with a focus on Transamerica. We will remain disciplined in our management of capital and any surplus cash that is not used for value-added growth opportunities that will be returned to shareholders over time. Slide #6 illustrates the impact of the transaction and the use of proceeds on our free cash flow per share. As you can see, we will replace the full ownership of our Dutch businesses with our strategic stake in a.s.r. upon completion of the transaction. This will result in a lower level of free cash flow. We plan to offset this by reducing our share count. Our free cash flow per share is expected to benefit over time from an increase in dividends from a.s.r., as synergies from the combination emerge. In addition, our funding costs will decrease as we reduce our gross financial leverage. Hence, our free cash flow per share will ultimately reflect the synergy value that is being created in the transaction. Furthermore, we expect that the level of free cash flow will continue to comfortably cover our dividend commitments. As you can see on Slide 7, we have been delivering on our commitments to provide attractive capital distributions to our shareholders in the form of sustainable dividends and return of surplus capital. Since the Capital Markets Day in 2020, we have paid or announced EUR 2.5 billion in capital distributions to shareholders or 39% of our market capitalization at that time. This includes the EUR 1.5 billion capital return that we have announced today as well as the payment of a steadily increasing dividend since the end of 2020. The progress that we have made so far on transforming Aegon into a high-performing company, provides us with the confidence to increase our payout ratio and raise the targeted dividend by EUR 0.05 to around EUR 0.30 per share over 2023. Slide 8 shows our delivery on the commitments that we have made to our shareholders. In less than 2 years, we have materially improved the performance trajectory of this company, and we have done so by: sharpening our strategic focus, by executing on our operational improvement plan, by releasing capital from financial assets, by actively managing our risk and capital positions and by investing capital in growth opportunities. But more work needs to be done to sustainably grow our business and become a leader in our chosen markets. The transaction that we have announced today is a pivotal step in this respect. Not only does it create a Dutch insurance champion, but it also brings increased focus and resources to better position the company for future growth. We will update you on our growth plans at our Capital Markets Day in the second quarter of 2023. Slide 9 outlines some key process steps. The closing of the transaction is subject to customary conditions, including regulatory and antitrust approvals, shareholder approvals and the completion of the Works Council consultation processes of both Aegon and a.s.r. Aegon expects to convene an extraordinary general meeting of shareholders in due course and request approval for the proposed combination between Aegon, the Netherlands and a.s.r.. We will also engage with our college supervisors on the implications that the intended transaction may have for our group supervision. Regardless of the outcome of this engagement, we intend to maintain our head office in the Netherlands. I will now wrap up on Slide #10. The transaction that we have announced today provides unique benefits to all our stakeholders. Customers, business partners, employees and stockholders will benefit from the creation of a leader in the Dutch insurance market. We are excited about this transaction. Not only does it create value for our shareholders, it also strengthens our conviction in achieving our ambition to become a leader in our chosen markets outside the Netherlands. And with that, I would like to open the call for a brief Q&A session. And in the interest of time, I kindly request you to limit yourself to 2 questions per person. Operator, please open the Q&A.

[Operator Instructions] Lard, your first question comes from the line of Andrew Sinclair.

Congratulations on the deal. Two questions for me, please. Firstly, was on the 29.99% stake in a.s.r. and how that effectively is affected by a.s.r.'s decision on how much equity to issue? Because it seems like it was 29.99% regardless of how much equity a.s.r. issues. So if a.s.r. issues more equity, does that improve the terms for you as essentially you're getting 29.99% of a more cash-rich, less-levered business, and likewise, as a.s.r. states they issued no equity and just raise that. Does that reduce the value of the transaction slightly to Aegon? That's my first question. And secondly, just Lard, you mentioned that you're intending to keep your head office in the Netherlands. But following the deal, why is the Netherlands the right country for Aegon to have its primary listing and head office going forward?

Thanks, Andrew, for your questions. The first one will -- well, the first one will be answered by Matt Rider, and I'll deal with the second one. So Matt, over to you.

So we have decided on that 29.99% equity stake. And then it's likely that they will need to do an equity issuance here. So we are going to maintain our stake. So the 29.99%, if you think about the gross proceeds that we're getting in, EUR 2.5 billion participating in the equity stake, it means that we will be short cash by about EUR 250 million, and then the balance of it to get to the net proceeds of EUR 2.2 billion is in transaction costs.

Yes, on your second question, well, first and foremost, we have a lot of activities in the Netherlands and we'll think to have them. The asset management business is a large business that we have here in the Netherlands, which, as part of this transaction, by the way, will strengthen further. We are a -- this combination that is going to be created, we're going to be a large strategic and supportive shareholder for that process. That integration process after closing will take quite a number of years to get right to build this Dutch a national champion and will require, in that sense, also a lot of attention. Then -- and in addition, we've been used to be a company that has many businesses across the globe, and we're able to navigate pretty well with our head office in the Netherlands to govern all those. So as we said today, we intend to keep our head office in the Netherlands.

And your next question comes from Steven Haywood.

Specifically on your foundation -- Aegon's foundation in the Netherlands, can you tell us what happens to this foundation that it still continues? And what are their thoughts about this proposal, the transaction? And secondly, on your U.K. business now, is this still core to Aegon considering now that you are of throwing off most of your Dutch businesses? Any thoughts going forward about the U.K. business would be helpful.

Thank you, Steven, for your questions, and I'll take both of them. Association Aegon is a stockholder, as you know, of the company of Aegon N.V. and it supported the Board of the Association Aegon has said that they are supportive of what we announced today. They, of course, need to go to their members and present that to their members with -- but they are supportive of this. And they are stockholder in Aegon N.V. So what happens as we continue? Yes, we're stockholder of Aegon N.V. and are supportive -- the Board is supportive of the transaction. Is the U.K. business still core? Yes. It's one of the core markets that we chose, as you may remember at the Capital Markets Day, where we said that our core markets are the U.S., the U.K., the Netherlands, our global asset management business and then our growth markets, Spain and Portugal, China and Brazil, and that's the core of the --that's, let's say, the future of the group that we are spending our attention on, and our objective is to create market-leading businesses in those markets. And this transaction today that we announced is, in fact, I think, effect doing that. So it's aligned with that strategy. So my short answer is, yes, it's still core. And we're going to continue to invest in the business and to make sure that we grow our workplace and retail platform there.

Next question comes from Farooq Hanif.

I'm going to ask one big question, which hopefully accounts it to. So I just want to understand the group supervision. So we have a Solvency II entity in the Netherlands post this deal. And within that, how are the capital requirements on your holding on a.s.r. going to be treated under that structure? And then in terms of group supervision, obviously, is it possible for you to -- I mean, will the [indiscernible] make any sense? I mean what if clearly your -- by far your biggest regulator is going to be the U.S. regulator -- regulators. And does it make sense for you within that to start thinking about dollar reporting -- dollar dividend reporting?

Yes, Farooq, thank you very much for your questions. It's going to be a coproduction between Matt and myself on answering this. First and foremost, who supervises the group, what the group implications are is something that we are engaging on with our college of supervisors. Obviously, we don't choose who our regulator is. That is something the college of supervisors and the implications of this transaction. That's something that is the college of supervisor's prerogative. Of course, we're engaging with them. And it's basically too early to tell on what the exact implications are. Now you have some technical questions around this. And for those, I'll hand over to Matt. As I always say, technical questions are the above my paygrade. So it's over to you.

Yes. So maybe just from a technical standpoint, we will continue to report Solvency II ratio. We will bring over the -- our proportional share of the own funds in the SCR and just simply reported in that way. One thing that we always say, though, is if the group solvency ratio is less important for us, we really tend to emphasize the solvency ratios of the main units and that -- and we will continue to do that.

So part of that, if I may just follow up. You're going to have a gigantic equity stake. How does that get treated in the Solvency II of the strategic?

Yes, very simple. We just bring over into -- so we bring over the own funds, 29.99%, and bring over 29.99% of the SCR.

Next question comes from Marcus Rivaldi.

I just got one question, please. On the debt deleveraging to come, could you just help me understanding what the baseline, the start point of your debt position from which you're going to delever from? Obviously, you had an existing debt deleveraging target in place. You've moved towards sort of top end of that on an FX-adjusted basis at the half year. Were you already intending to take a bit more down? And therefore, EUR 700 would come on top of that or do we start from the EUR 5.4 billion FX number?

Thanks, Marcus. Yes, Matt?

So the outstanding leverage that we have as of the second quarter was about EUR 5.7 billion. And when we did the second quarter results, we said we're stopping at that point. So now the -- up to EUR 700 million of additional deleveraging comes off of that number.

Your next question comes from Nasib Ahmed.

First question is on the free cash flow per share and how that's increasing. So if I look at the free cash flow numbers in euros, you're using about EUR 250 million of free cash flow from the Netherlands, gaining about EUR 160 million based on the EPS guided to by a.s.r. And then you left about EUR 90 million. Is that -- is it roughly half and half of the EUR 90 million made up of that deleveraging and the rest synergies? I'm just trying to understand just kind of the breakdown of the EUR 90 million, the gap. And then secondly, on the EUR 1.5 billion capital return, I think you're indicating that it's probably going to be a share count reduction. So is it going to be a share buyback and over what time? And is the strategic stake in a.s.r. going to be reduced over time as well leading to further capital returns?

Matt?

So maybe starting with the gross amount of the free cash flow and thinking about the math that you just put together. So I mean if you think about it an indicative free cash flow number for 2022, pre the deal, would be about EUR 730 million. Deduct from that, about EUR 250 million, which is the free cash flow for the Netherlands business. There are going to be some stranded costs, so deduct EUR 40 million off of that. And then you have it exactly right. Our stake in [indiscernible] dividend is about EUR 160 million. So in general, you're looking at a reduction in the free cash flow, relative to the predeal, of about 15% to 20% in the short term. Now we get that back. So the idea is that over time, we're going to get synergies -- a synergy benefit and we are going to get the benefit from reduced funding costs relative to the deleveraging. So that means sort of 15% to 20% down in the short term and then we'll go up by 10% to 15% based on the last numbers that I gave. That's on an absolute basis. But then we have the impact of reducing the share count. So net-net, on a free cash flow per share basis, we would expect to see some accretion.