Aegon Ltd (AEG) 2018 Q4 法說會逐字稿

Good day, and welcome to the Aegon Second Half Year 2018 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.

Thank you, sir. Good morning, everyone, and thank you for joining this conference call on Aegon's Second Half 2018 Results and Medium-term Targets.

We would appreciate it if you take a moment to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. Our CFO, Matt Rider, will walk you through the highlights of the second half of 2018 before handing it over to our CEO, Alex Wynaendts, to provide an overview of our key strategic achievements and new medium-term targets.

Given we are not only presenting our results but also laying out new targets, this presentation will be somewhat more extensive than usual. However, we will, of course, leave more than sufficient time for your questions at the end.

I'll now hand it over to Matt.

Good morning, everyone. Thank you all for your continued interest in Aegon and for joining us on today's call. Although this was a challenging and complex half year with many moving parts, we have achieved some very important milestones, which are shown on this slide.

We have delivered on our EUR 350 million expense savings target. In addition, we have made strong progress on resolving the servicing issues related to the Cofunds integration.

I'm pleased to report that we have maintained our strong capital position and are reporting a 211% Solvency II ratio at the end of 2018 despite unfavorable market impacts.

In addition, our holding excess cash position ended well within our target range at EUR 1.3 billion, while we continue to manage our leverage ratio down.

Normalized capital generation after holding expenses for the full year 2018 rose to EUR 1.4 billion, which further supported increasing remittances from the operating units to the group. This leaves our dividend payments to shareholders well covered as the full year-end dividend will increase by EUR 0.02 to EUR 0.29 per share.

Now I would like to take you through our financial results in a bit more detail, starting with our earnings.

I'm now on Slide 3. During the second half of 2018, underlying earnings declined by 8% compared with the same period last year, despite the benefit from expense savings. Our ambitious expense savings program led to an uplift of EUR 38 million compared with last year.

Underlying earnings also benefited from business growth in Spain and Portugal, higher interest margins in the Netherlands and continued growth of the U.K. platform business. However, the overall result was impacted by lower earnings from U.S. retirement plans and adverse claims experience in the U.S. The lower earnings from U.S. retirement plans were mainly driven by lower fee income from lower asset balances, the lower investment margin and investments on operations and technology to improve service levels and to drive growth. We plan to take further actions to improve future results, which I will discuss in more detail later in this presentation.

The second half of 2017 included EUR 62 million of favorable claims experience, which did not recur. In the current period, unfavorable claims experience of EUR 14 million was driven by mortality experience in life and retirement plans, which was partly offset by favorable claims experience in Accident & Health. Overall claims experience in our Long-Term Care block of business continues to track in line with management's best estimate assumptions, with an actual to expected claims ratio of 100% for the full year 2018.

Now let's turn to the next slide, on which I will provide you with the outcome of our expense savings program. As you can see, we have achieved annualized run rate expense savings of EUR 355 million since we initiated the program in 2016, and therefore, delivered on our EUR 350 million target. Our U.S. operations achieved expense savings of $270 million over the last 3 years. A significant contributor to the U.S. savings was the partnership entered into with TCS earlier in 2018, which generated approximately 1/3 of the total benefit achieved. However, investments to improve service levels within retirement plans drove staffing levels and related expenses higher than planned. Furthermore, Transamerica made investments in operations and technology in the second half of 2018 to position the business to accelerate growth.

At a group level, the slight shortfall in the U.S. was compensated by additional expense savings in the Netherlands. Digitization of the business, automation of processes and efficiencies in the marketing and sales organization delivered EUR 79 million run rate expense savings compared with the original EUR 50 million targeted for the Netherlands. Expense savings at the holding totaled EUR 19 million versus the target of EUR 15 million.

On the following slide, I would like to elaborate on the results of our U.S. retirement plans business. As you can see on the slide, second half underlying earnings in the U.S. retirement plans business decreased to $59 million compared with the same period last year. A substantial part of this decline is driven by reallocation of expenses between product lines in the U.S., which we undertook earlier in 2018. This was done to better reflect the expense savings program, which has now been completed. Adjusting for this, the drivers for the decline in earnings were lower investment margin and net fee revenue, in addition to investments in technology and onetime items. Lower investment margins and lower fee revenue were mainly driven by declining balances as a consequence of net outflows and a decline in equity markets. Onetime items consist of several unrelated elements and adverse mortality experience. About half of the onetime items relate to timing issues between the first half and the second year half year reporting periods. The remainder is made up of several smaller items.

As I mentioned on the previous slide, the increase in expenses resulted from higher investments on operations and technology to further improve service levels to drive future growth. As mentioned at the Analyst and Investor Conference last December, there are several initiatives in place to accelerate growth within the retirement plans business. These include driving the placement and penetration of Managed Advice in new and existing defined contribution plans as well as growing the share of revenue-enhancing services. We are confident that the results for this block of business will improve as a result of these actions.

On the following slide, I would like to walk you through our net income development for the last 6 months of the year. Net income amounted to EUR 253 million, which is a decline of 83% versus the same period last year. This decrease was mainly the result of losses on fair value items and other charges while income tax was a benefit. The loss from fair value items totaled EUR 257 million in the last 6 months of 2018. Gains from fair value items in Europe, Asia and the holding mainly resulted from hedging gains, in addition to real estate revaluations in the Netherlands. These gains were more than offset by losses in the U.S., which came largely from the underperformance of alternative investments and the impact of market movements on hedging. The loss was higher than expected, partly due to lower-than-anticipated gains from our macro hedge.

Other charges amounted to EUR 581 million, which I will discuss in more detail on the next slide. Finally, income tax amounted to a benefit of EUR 117 million. This included onetime tax benefits of EUR 84 million as a result of reductions in both the U.S. and Dutch corporate income tax rates, in addition to regular tax-exempt income items and tax credits.

I'm on Slide 7. As mentioned on the previous slide, other charges amounted to EUR 581 million. We had flagged the majority of these in advance, including: EUR 147 million provision related to the settlement of a class action lawsuit with U.S. universal life policyholders; a book loss in the earlier announced sale of the last substantial block of life reinsurance business; transition and conversion charges related to the TCS partnership in the U.S. and to the Atos partnership in the U.K. In addition, the U.K. had integration expenses related to Cofunds and BlackRock's defined contribution business. Furthermore, other charges at the holding amounted to EUR 36 million as we continue to prepare for IFRS 9 and 17.

The main item we hadn't flagged was the outcome of model and assumption changes in the Netherlands of EUR 138 million. These were mainly driven by adding a year of European mortality experience to our management best estimate for longevity and updating lapse assumptions in the individual life portfolio.

On the next slide, I will give you more details on the macro hedge results in our U.S. business in the second half of 2018. Our macro hedge program is in place to protect regulatory capital in a down equity market scenario rather than being focused on IFRS. In case equity markets declined by 25%, the aim of the program is to limit the impact to the consolidated RBC ratio of the U.S. to 25 percentage points. If there wasn't a hedging program in place, such a scenario would lead to a drop of approximately 50 percentage points.

Over the last 2 years, the hedging program performed in line with expectations and stated sensitivities, as you could see from the table on the left-hand side of the slide.

After switching to a full option-based program in 2017, the run rate costs have decreased significantly from $60 million to $45 million per quarter. What's more, actual results have tracked our sensitivities on average over the past 2 years. These sensitivities include the assumption of rising implied volatility in case of sharp market declines. The table on the right side of the slide shows that we typically see increases in implied volatility when equity markets decline sharply. However, in the market decline we witnessed in the last month of 2018, implied volatility did not increase. This led to a deviation from our expected hedge payoff of $96 million.

We now turn to Slide 9. In the first half of 2018, we mentioned that we established a program to address service issues associated with the Cofunds retail migration onto Aegon technology earlier in 2018. I'm pleased that these measures have been effective, as you can see on this slide. As a result of the program, core trading and service levels have returned to target levels. Going forward, the focus for the retail service is to further improve its functionality and ease of use, in addition to the nationwide migration, which we expect to take place in the first half of 2019. To date, Aegon has realized GBP 40 million of annualized expense savings from integrating the Cofunds business, a figure which will rise to GBP 60 million following the nationwide integration.

Let's now move to capital on the next slide. As you can see on Slide 10, our group Solvency II ratio declined slightly to 211% in the second half of 2018. Growth in owned funds was driven by strong capital generation, net of new business stream, which more than offset the approximately EUR 300 million paid out for the interim 2018 dividend. An increase in our SCR by EUR 400 million was mainly driven by unfavorable market variances. These were the results of declining equity markets in the U.S. and adverse credit spread movements in the Netherlands.

Model and assumption changes had, on balance, a positive impact of 6 percentage points on the group's solvency ratio. The implementation of a new dynamic volatility adjustment model in the Netherlands led to a lower SCR, as we removed countercyclical elements from our model to align with EIOPA guidance. This model change results in an increase in the 1- and 10-year combined sensitivities. And as a result, Aegon is reviewing its capital target zones in the Netherlands. We are considering increasing the midpoint of the target zone by 5 to 10 percentage points.

In line with our normal practice, we also updated actuarial and other assumptions in our European entities in the second half of 2018. In the Netherlands, this resulted in lower owned funds from several changes, most notably relating to mortgage valuation, mortality rates and lapse assumptions. For mortgages, we updated the number of assumptions reflecting changes in market conditions. This was partly offset by the positive impact of expense assumption updates in the United Kingdom, reflecting the partnership with Atos.

Onetime items and other had only a small impact on balance. Several onetime items in the U.S. largely offset each other. The benefit from the elimination of our variable annuity captive of $1 billion was offset by the impact of U.S. tax reform.

Let's now move to U.S. credit risk sensitivity. Over the last years, we have actively managed down the sensitivity to a deterioration in credit markets for our businesses. Decrease in credit exposure was the result of various divestments and product redesign efforts as we focused on fee and protection-based businesses. As a result, we have significantly decreased our general account from over $135 billion in 2017 -- 2007 to just over $80 billion in 2018. With the U.S. RBC ratio well above our target range at 465% at year-end 2018, we are well positioned to absorb credit losses. In a 1-in-40 scenario, we would expect to see credit defaults similar to the levels seen in 2009. Even in this scenario, which includes the impact of the anticipated rating migration, our U.S. RBC ratio would remain in the upper end of our target range of 350% to 450%.

Turning to Slide 12. At the end of the second half of 2018, holding excess cash amounted to EUR 1.3 billion. Gross remittances to the holding of EUR 786 million included over EUR 500 million from the U.S., EUR 215 million from Europe, including a final dividend from the Netherlands and the U.K.; and EUR 50 million from Asia and Aegon Asset Management. These remittances were more than offset by EUR 700 million of debt redemptions and EUR 57 million of capital injections to support the growth of business in asset management, Central and Eastern Europe, Spain and Portugal and Asia. In addition, the acquisition of Robidus, the leading income protection service provider in the Netherlands, led to a cash outflow of EUR 97 million. Cash outflows related to the cash portion of the 2018 interim dividend and the share buybacks to neutralize the final 2017 and interim 2018 stock dividends, in addition to holding, funding and operating expenses, amounted to about EUR 600 million. As a result, our excess cash position sits within our target range of EUR 1 billion to EUR 1.5 billion.

Let's now move to our gross financial leverage ratio on the next slide. As of the second half of 2018, we retrospectively changed the internal definition of shareholders' equity we use to calculate both the return on equity as well as the gross financial leverage ratio. To align it more closely with peers and rating agencies, we will no longer adjust shareholders' equity for the remeasurement of defined benefit plans. Based on this more conservative calculation, the gross financial leverage ratio decreased by 160 basis points to 29.2%, which is still within our target range of 26% to 30%, which we do not intend to change. This was driven by the previously mentioned EUR 700 million of debt redemptions in the second half of 2018. Under the previous definition, the gross financial leverage ratio would have been 27%. As mentioned on previous occasions, we are actively managing our leverage ratio toward the lower end of our 26% to 30% target range. Despite the new more conservative definition, again, we do not intend to change our gross financial leverage ratio target range. This reflects a focus on further deleveraging the group, which will lead to an increase in the quality of our capital.

I will now turn it over to Alex so that he can provide an overview of our key strategic achievements and outline our new medium-term targets.

Thank you, Matt, and good morning to everyone. In my part of the presentation, I'll present a new set of medium-term targets for the period 2019 to 2021, but let me first outline our achievements of the period 2016 to 2018. I'm starting here with Slide 15.

In the past years, we have simplified and modernized our group. We have refocused the business towards areas with higher growth and the potential for broader advice, service and solutions-based relationship with all of our customers. We built the company to be more relevant than ever into our 29 million customers as we help them through the journey of the financial lifetime. In doing so, we have not only significantly increased our free cash flow but also strengthened our capital base. And today, we have a well-established capital framework with strong solvency ratios for our main units and for the group. One example of our measures to further improve the capital position of the group was the elimination of the variable annuity captive in the U.S. in the second half of 2018.

Furthermore, we've optimized our portfolio over the past few years. We have rationalized our geographical footprint by focusing our resources on key markets where we have either leading market positions and scale or where we have strong growth opportunities for the future. And the most recent example being the completion of the divestment of operations in Slovakia and the Czech Republic on January 8, 2019.

I am proud of what we have achieved over the past 3 years. And during that period, we've attracted nearly 4 million new customers and more than EUR 100 billion of additional assets. Having improved our competitiveness, strengthened our capital position and diversified our business, we are now in a position to fully focus in growing in our main markets.

In the next slide, I will briefly cover how we delivered on our 2016-'18 targets.

As Matt mentioned earlier, we have delivered EUR 355 million of annualized savings, slightly ahead of our 2016-2018 target, with U.S. falling a little short of the target, but this was more than compensated by additional savings in The Netherlands and the holding.

We've also achieved our target of returning EUR 2.1 billion in capital to shareholders. And at the same time, we have increased our capital position and quality, which allowed us to further increase our dividend. We will propose a final dividend for 2018 of EUR 0.15 per share, which brings the full year dividend to EUR 0.29, EUR 0.02 or 7% higher compared to the previous year. The strength of our franchise is demonstrated by consistent increase in the return on equity year-on-year. Since 2015, we have increased the return on equity by about 2 full percentage points. And as Matt has covered in his part of the presentation, we changed our internal definition to calculate our return on equity to align closer to definition used by peers and rating agencies. And based on this new definition, we have achieved a return on equity of 10.2%, while the old definition would have resulted in a return on equity of 9.3% for 2018.

So let us now look forward and turn to Slide 17 of the presentation. For the next strategic cycle, covering the period 2019 to 2021, we will be focusing on driving profitable sales growth and sustainably growing our capital generation. We will do this leveraging -- by leveraging our large customer base where we have the opportunity to broaden and expand our customer relationships by offering our strong suite of bundled products and advisory propositions. As customer needs and demands evolve, we will continue to evolve our operating models towards less capital-intensive, more fee-generating and protection products while at the same time enhancing the customer experience through the extended use of data and data analytics. We are very well placed to benefit from long-term retirement trends and pension needs of our customers. For example, the Americas has attracted 700,000 new customers over a quarter, and also Spain and Hungary attracted 200,000 customers in the same period. We outlined at the Analyst and Investor Conference in New York how Transamerica in the U.S. is well ahead of the competition with its market-leading partnership with TCS. This partnership will enable Transamerica to provide faster and better propositions to our customers and to grow its reach in the U.S., the largest retirement market in the world. This approach will generate significant financial benefits, as I will explain on the next page, introducing our new medium-term targets.

I'm now on Slide 18. So we are confident that our growth strategy will deliver sustainable and attractive returns to shareholders. And at the core of our strategy is the capital we generate from our global operations. For the next 3 years, we are targeting a normalized capital generation of EUR 4.1 billion cumulatively. Normalized capital generation excludes market impacts and onetime items and is after holding funding and operating expenses. Our strategy will lead to attractive returns to our shareholders as we are targeting to pay 45% to 55% of normalized capital generation as a dividend to our shareholders.

Going forward, we'll support our medium-term targets with a 1-year remittance guidance. And for 2019, we aim for gross remittances of EUR 1.5 billion. This will support our annual dividend. In addition, remittances will be used to invest in growth, finance holding funding and operating expenses and leave sufficient financial flexibility for further deleveraging, potential add-on acquisitions or additional capital returns to our shareholders. And last but not least, we continue to target a return on equity of more than 10% going forward.

I'm now on Slide 19, our targets are underpinned by an active management of our portfolio of businesses. Going forward, we are grouping our businesses into 3 distinct strategic categories. The strategic categories are differentiated from each other based on the maturity of our businesses in our different markets, and each business is managed according to its unique features. This will allow us to unlock the full potential of our larger customer base and market propositions while at the same time leveraging our capabilities and proposition where they are most beneficial.

The first category, manage for value, includes mature at-scale businesses, which often operate in a single product relationship and are generally spread based. Our remaining close books of businesses are also included here. For example, our Dutch life and the U.K. existing businesses. We carefully manage our financial and operational risks to ensure that the important cash flows we generate from these businesses are optimized. Manage For value businesses are an important capital and earnings source for the group for many years to come.

The second category, drive for growth, we have group businesses which are at scale and have strong market positions with an attractive, profitable long-term growth potential. These businesses are highly capital-generative and invest part of the capital generation in strong new business growth. Propositions are mostly digital or platform based with an emphasis on fee income and protection coverage, while focusing on broader and longer relationships with our customers and advisers. Good examples here are the U.S. workplace business and the U.K. digital solutions.

And finally, we have the scale-up for the future category, which are a set of businesses that had a meaningful market opportunity. Similar to the drive for growth businesses, these businesses focus on fee and protection-based products but still require scaling up in size and expanding the customer relationships to multiple products. Scale-up businesses bring new platforms, technology or business models into the group, which can also be leveraged across our current drive for growth business. A business might shift between categories if the features of the markets change or business develops significantly.

So let me now give you an overview of our current portfolio structure based on these 3 categories on Page 20.

As you can see on the left-hand graph, manage for value and drive for growth businesses each generates today about half of our capital. Drive for growth are the businesses at the core of our growth strategy. And as the middle graph shows, the vast majority of our new business strain is allocated to drive for growth businesses. As outlined during our A&I conference in New York, we invest in new business, especially in our indexed universal life and retirement plan businesses in the U.S. Scale-up for the future businesses focus on propositions, which, as you can see, have limited new business strain. On the right side of the page, we show the allocated IFRS capital. Manage for value businesses are capital-intensive and represent a significant amount of IFRS capital while the drive for growth businesses have the highest returns, are at scale and therefore have more than half of the group's capital allocated to them. And today, only 9% of the group's capital is invested in new future growth businesses.

On the next slide, Slide 21, I will highlight how these businesses will contribute to the growth of our future capital generation. As mentioned earlier, we are targeting a normalized capital generation of EUR 4.1 billion cumulatively over the period 2019 to 2021, and this is an increase of more than 25% compared to the last 3 years, where we generated EUR 3.1 billion of capital generation. And looking at the different strategic categories, we expect a slightly declining capital generation from the manage for value businesses as the portfolio matures. And clearly visible is a strong increase in the capital generation from the drive for growth businesses in the next 3 years. And we expect the growth in capital generation in this category to be driven by the allocation of the vast majority of the more than EUR 3 billion we will invest in new business. Capital generation from scale-up for the future will grow from a small basis of EUR 300 million of capital generated in 2016 to 2018 to a stronger contribution over time.

In the next 3 slides, I will give you more detailed view on our portfolio.

I'm on Slide 22. And on the left-hand side of the slide, you will find list of the businesses which we include in the manage for value category. In 2018, these businesses generated normalized capital of around EUR 700 million and earnings of EUR 749 million with a return on IFRS capital allocated of 8.1%, and this is before the benefit of leverage at the holding. For the future, we expect these businesses to mature further, and therefore, capital generation and earnings will trend downwards. At the same time, this category remains capital-intensive and will require allocated IFRS capital of more than EUR 700 million for the next years.

Continued expense savings will remain a key focus point as the size of this portfolio reduces over time. And at the same time, we will consider all options to optimize the capital position of these businesses and potentially also to accelerate the capital generation. So for example, in our Netherlands defined benefit pension and individual life businesses, we are managing expenses down as the boost decline as demonstrated by recent expense savings program. We're also optimizing investment income by investing in assets with attractive risk return profile such as mortgages. And we are migrating customers to new capital-light solutions such as the new PPI defined contribution pension plans, but also long-term bank savings and investment products.

Another example of cost reduction is the recently announced expanded cooperation with Atos in the U.K., who will support the servicing and administration of the non-platform customers in the U.K.'s existing businesses.

I'll now turn to Slide 23, where we'll outline the features of the drive for growth category. Our large and more mature businesses are categorized in drive for growth. For the U.S., the 4 large business lines: Life, Accident & Health, Retirement Plans and Variable Annuities are all included. Furthermore, our U.K. digital solutions business, Aegon Asset Management, and our smaller but well-developed countries in CEE and our Asian High-Net-Worth operations are part of drive for growth. These businesses have generated about EUR 900 million of capital, EUR 1.3 billion of earnings and delivered a strong 10.2% return on IFRS capital in 2018, again, here, before the benefit of leverage at the holding. The result of operational leverage in larger businesses, the return on capital is expected to increase even though the capital allocated is trending upwards from today's EUR 11 billion allocated IFRS capital.

Key enablers for this growth story are the completion of the Cofunds integration in the U.K. and, of course, the TCS partnership in the U.S. The partnership with TCS will not only modernize our operating platform but will also support acceleration of our organic growth, strengthen customer relationships as well as increase customer retention. The bank's platform will enable us to shorten time to market for new products, to increase sales efficiency and to provide better service for our customers.

Businesses in the scale-up for the future category are expected to be the longer-term future growth engines for the group, and let me introduce them to you on the next slide, Slide 24.

Capital generation in the scale-up for the future category is currently small with less than EUR 100 million per year, but we expect it to grow over time considerably. Also, underlying earnings amount only to roughly EUR 200 million but will grow in the next years. Only limited amount of IFRS capital with less than EUR 2 billion is currently allocated to these businesses and generates a return capital of about 7%. And as the business grow and gain scale, we target considerably higher returns on capital from these operations. We consider businesses such as the Dutch service business, Spain and Portugal and Latin America as promising businesses, which will achieve scale and become meaningful contributors to the group. Our Dutch bank operations and the U.S. mutual funds business are already further advanced in terms of the financial contribution, and we expect them to capture significant growth potential going forward.

Aegon's Dutch banking activities are an excellent example of a scale-up for the future business. Before 2012, the operation was subscale and loss-making. Since then, Aegon Bank has been restructured in terms of processes, costs and product offering. And today, Aegon Bank has a significantly improved return on capital of well over 10%. It has launched Knab, a digital disruptor in the Dutch banking markets, as a new brand, and it is making strong inroads into the fast-growing segment of the self-employed, adding 40,000 customers per year. Knab is recognized for excellent service levels, as demonstrated by having the highest Net Promoter Score amongst Dutch financial service providers.

Our Asian joint ventures, with the exception of our Chinese joint venture, are still loss-making. However, we are confident that our investments in countries like China and India will create significant value over the longer term.

While we develop the businesses based on other platforms and digital technologies, we also apply strict investment criteria, as shown on the right-hand side of the slide. Should our investment criteria not be met, all options are open for these businesses. And over time and as businesses develop and mature, we expect them to move to the drive for growth category as strong growth contributors to the group.

So finally, let me turn to Slide 25. In summary, we're targeting increasing capital returns to our shareholders. As mentioned, between 45% and 55% of the normalized capital generation will be returned to shareholders in the period 2019 to 2021. And I've outlined on the previous slides how we think about generating sustainably growing capital. Targeting gross remittances of EUR 1.5 billion for 2019 supports our view of having solid dividend coverage while maintaining ample financial flexibility. And we will use our financial flexibility for further deleveraging, potential add-on acquisitions or additional capital returns to our shareholders.

I strongly believe Aegon is today well positioned for the future and has a broad spectrum of businesses to deliver on the targets we have set.

And for the full year 2018, I'm pleased to announce that we propose to increase the dividend to EUR 0.29 for the full year. This is a EUR 0.02 per share or 7% increase on a year-on-year basis.

So to sum up, let me now turn to Slide 26. Looking ahead, we are well placed to focus on profitable growth and sustainable capital generation building on the progress made in recent years. By successfully executing on our strategy, we'll be able to deliver on our purpose and help many more people achieve a lifetime of financial security in addition to generating long-term value for all our stakeholders.

I would like to thank you for your attention, and Matt and I are now happy to take your questions.

(Operator Instructions) We will now take our first question from Robin van den Broek from Mediobanca.

I guess my first question is on the definition change of the leverage ratio. I mean it's quite a big step change. You're still sticking to the lower end of the target range, which effectively means that a lot of capital that's coming in, in future years is allocated to reducing the leverage versus the previous definition. So I was just wondering what's triggering that. And to get a little bit more color on that. Because I think that's probably also the reason why the shares are fairly -- are not very responsive to your new targets. In relation to that, I was just thinking about how should we think about dividend progression. I mean I think the EUR 0.01 added to the full final dividend I think is supportive, but the payout ratio of 45% to 55% is not indicative for progressive dividends per se. So just wondering if you look at your holdco cash level, your Solvency II levels, your gross cash generation guidance for 2019, I mean, these are all pretty supportive to keep that dividend growing. I was just curious to see what -- when you would adopt the higher end of the payout ratio and when would you adopt the lower end of the payout ratio. And thirdly, yes, I guess, U.S. reporting has been somewhat disappointing throughout 2018. I guess we can blame markets to -- for a certain extent. But I was just wondering, commercial momentum still needs to turn around. You're suffering margin pressure. Still, you talk about growth while markets going forward might be a lot less supportive than they have been in the last years. I was just wondering what kind of gross inflows are you baking into your business plan to get to your growth ambition levels.

Okay. Thanks, Robin. This is Matt. Maybe on the definition of the leverage ratio. This was a -- we take a look at what peers were doing. We were taking a look at how the rating agencies were looking at leverage in the capital base, and we made this move to align with peers. The actual -- I guess, Aegon had implemented this adjustment, where we were adding back the remeasurement of defined benefit plans back in 2013 in order to keep the -- and this relates to an accounting change that was implemented at that time for IFRS. And we did it at a time to make sure that we kept the capital base stable and to make sure that it was not too volatile. But then having looked at what peers were doing and what rating agencies and how they were looking at it, we decided to make the change. Now having said that, so we're not going to -- as you mentioned, we are not going to change our target ranges, and this does reflect the fact that we do want to move the leverage ratio down over time, but it doesn't necessarily represent massive amounts of additional deleveraging. We are retaining earnings in excess of the amount that we're paying out as dividend. So I think that's an important component. We would see this drip down over time to the extent that we retain earnings. With respect to the dividend progression, I think what we wanted to do is set a capital-generation target, a 3-year capital generation target that we felt that we could really make. We set that 45% to 55% target range just to give you some guidance as to how we intend to deploy that capital. The EUR 0.02 dividend increase for this year, it should send you a -- it should send a strong signal that we have confidence in the progression of being able to generate normalized -- or being able to generate capital, but we are not giving any guidance further than that. So we want to stick to 1-year guidance at a time, gross remittance targets from the business units 1 year at a time and the overall 3-year capital-generation target. But again, I think you should take something from the fact that we increased the dividend EUR 0.02 today.

Let me take your third question. You are absolutely right to say that the sales development in 2018 in the U.S. has been disappointing. We have, of course, been working very hard on the transformation of our business. We spent a lot of efforts in getting the TCS outsourcing deal done. We feel therefore that today we're well placed and that a lot of the steps we have to take in order to be well prepared to grow, we've taken those steps, and we can now focus on the growth in the coming years. It's difficult to give you a number of net flows and deposits because, as you know, you have deposits of all different categories with different margins. But what I think would be helpful is to guide you and to remind you that actually we have, in our plan, as shared, in terms of capital generation baked in a 20% increase of our new business strain from a low level of EUR 850 million. So I think that will give you a good indication of how we are intending to invest in growing our business going forward. And which areas in the U.S. are going to be -- we will most focus on is individual life, it is IUL product. As you know, that's a market that we know well and we have very strong distribution capabilities. Term life, also, we've done some repricing at the end of last year, and we are seeing the benefits there. And of course, the big focus, we'll continue to drive positive net inflows in our retirement business. The Mercer acquisition has brought us a capability, which we didn't have before, which is really in the mega cases. So we expect to see this year not a positive impact of the full integration of Mercer and, therefore, a more successful development in terms of new business sales, in particular in the big cases. All I can say at this point in time is that we -- on the basis of what we've seen in January, we are pretty encouraged about that development.

Okay. Maybe one follow-up on the leverage ratio. I think in the past you said that IFRS 17 would negatively affect your leverage ratio. I presume that is still the case. But will you still be targeting a low end of the target range after IFRS 17? Or is this basically just in anticipation of IFRS 17?

I think what I said is we don't know exactly where IFRS 17 is going to come out, so to let's say the prudent move would be to reduce leverage in anticipation of that. But we have to see exactly where it comes out. And then at that moment, we may decide to reset our target ranges, but it looks like today that time might not come until 2022. So for right now, we stick with these target ranges.

We will now take our next question from Farooq Hanif from Crédit Suisse.

Firstly, just returning to the U.S. retirement services business. Looking at all the drivers that you showed of the lower profits in the second half of '18, it seems to me that some of this is kind of a continuing effect in 2019. So I was wondering if, as of today, your $52 revenue per participant guidance that you gave still stands or whether, as of today, there might be a slight reduction on that in the near term. And just going back to what you said about flows in January. Are you basically seeing now positive net flows? That's question -- area one. And then question two on numbers. You've given the target components for the EUR 4.1 billion of cumulative capital generation. So that EUR 3 billion strain -- EUR 8 billion normalized capital generation and EUR 1 billion of holding, what were those numbers for the last 3 years so that we can see what's changed in the mix?

So I'll take the first one. On the retirement services business, I think you're right. I think the guidance that we had given was $52 per participant. I think the last number that I saw was something a little north of 4.2 million participants. I would expect that the $52 would come down somewhere between 5% and 10% as a consequence of these ongoing things that you rightfully mentioned. As in terms of flows for January, without giving any numbers, so far they look pretty positive. Looking at the -- you asked a question about the composition of the capital generation for the 3-year target. I think we're going to have to come back to you for the last 3 years of historical information there, but I think that can be done off-line.

We will now take our next question from Ashik Musaddi from JPMorgan.

Just a couple of questions. Sorry. I'm going back to the capital generation and the dividend. So if I think about your guidance of EUR 4.1 billion, it's over 3 years, so is it fair to say that it will be like an increasing number, i.e. starting with a lower number in 2019, followed by higher and higher after that? So is that fair to say? And just in terms of payout ratio, 45% to 55%. I mean, if we, let's say, get into a normal market basically rather than super volatile market, is it fair to say that the 50% payout ratio is more reasonable rather than going towards 49 -- 45% or 55%? I mean we are just analysts, so we're just taking like 50% payout ratio is what I think is what the guidance looks like. So any thoughts on that would be great. And thirdly is in terms of the same capital generation, can you give us some clarity as to about the geographical breakdown as well on that number? Any thoughts on U.S., how much Netherlands and how much U.K. you are expecting? Any thoughts on that would be great.

So I take the first one. So you mentioned what do we think that the progression of the normalized capital generation might be, so we telegraphed the EUR 4.1 billion over the next 3 years. I think you got it pretty right. We generated EUR 1.4 billion capital generation in 2018. That was based on basically a surplus strain of about EUR 860 million for the year. That's probably EUR 100 million or so light of where we thought it might be, so you can kind of use that as a guide for trajectory. In terms of the capital generation for each of the countries, what we did in the target is try to group things in buckets at kind of a high level, but I think we can probably come back to you on country-level detail on that one. But our goal here is, and this is sort of an important one, we want to make sure that we're putting a very limited number of targets into the markets. So putting capital generation out there for the group for a 3-year period and the payout ratio, the 45% to 55%, and the 10% ROE with the 1-year remittance guidance, that's about all we're -- that's all we're going to do in terms of targets. We don't want to break it down too much more than that. We do it in aggregate just to limit the number of targets that we get out.

Sure. I just have one follow-up. Just one follow-up on that. I mean you mentioned around 45% to 55% payout. So you will still be retaining around 50% cash, which is still a healthy amount, around EUR 600 million, EUR 700 million a year. I mean what would be your -- I mean, the priority list for that? I mean, will it be leverage reduction first? M&A second? Because -- and any thoughts on what are on the file -- what are on the table on the M&A perspective at the moment?

Maybe let me answer this question. You're rightly pointing out that we are retaining capital for flexibility. I mentioned that in my presentation. We have said that we need to ensure that we cover, of course, our own expense holding costs, the cost of leverage. That's the first thing. Matt addressed also just now leverage, and we want to stay in the middle of the range of our leverage ratio. But importantly, also, we want to have flexibility for add-on acquisitions. We've done a few, which I think have demonstrated that we're able to -- like Cofunds and Mercer, small add-on acquisitions, which effectively bring in a lot of new customers on our existing platforms. I think that's a very attractive way for us to attract new customers and growing our business. And as I said in my introduction on the targets, the remaining part will be considered to be returned to shareholders.

We will now take our next question from Nick Holmes from Societe Generale.

Just a couple of questions on the U.S. First, how concerned are you about another potential market downturn, especially since the retirement business took a pretty big hit just on the Q4 market slump? And then a wider question. Are there any circumstances in which you might consider IPO-ing the U.S. business? Tricky question. I know.

Well, Nick, I think these are questions that are reasonable questions in relation to the market. You're right to say that the market has had an impact on our pension business. But I think it's not only on the fees because effectively what you see is that the assets decline in value and therefore the fees decline in value. But also in uncertain times, people are not so prone to make changes and to invest for the future, so they're kind of holding off a little bit. So what you see is that market downturns are usually not very good also for new business because people just decide to postpone a decision to take. On the U.S., I will repeat what I think you know that the U.S. is an integral part of our organization, has been very supportive of the group and will continue to be an integral part of our organization and supportive of the group in terms of capital generation and supporting us paying the dividends.

Sorry. Just a quick follow-up in terms of synergies between U.S. and the rest of the group, can you identify any sort of business rationale for having such a large U.S. operation?

Well, there's quite a lot of benefits. First of all, there's a diversification benefit. There's a diversification benefit in being present in different parts of the world, from an economic cycle point of view, from a business cycle point of view and, also therefore, from a capital point of view. I think it's extremely important to recognize the diversification benefit directly and indirectly coming across in the amount of capital that we would need to hold. And what we also make sure is that we leverage from an operational point of view as much as we can. So as you know, we have a separate technology group that provides services to each of our units around the world. That can, of course, leverage scale, which we could not do if we did not have to group together. We have an asset management operations, global asset management operations, that has the scale, the capabilities that it would not have if it would be in different parts of the world and split up in different parts of the world. And finally, one of the things, which I think we should also not forget, in addition to the operation -- around IT procurement and others, is that we need to be able to continue to attract good talent, strong talent. There is a war in talent. We are changing our business into a much more digital business and much more technology-driven business. And we therefore, need to attract the right people. I can assure you that it is much easier for Aegon to attract the right people by being part of a global operation, global organization, very visible here in the Netherlands, very visible in the U.S. And that is a long-term benefit that I think we should not underestimate.

We will now take our next question from William Hawkins from KBW.

First of all, the Dutch mortality and lapsed assumption changes, do they have any impacts on future earnings. If you could guide on that, that would be helpful. Secondly, long-term care, good news. Doesn't seem to be much of a feature in the second half, at least in the headlines. But is there anything we should be thinking about in terms of long-term care sensitivity through 2019? In particular, I think the morbidity improvement assumption is still embedded, and I'm not sure what the timetable and likelihood of adjusting that is. And then lastly -- maybe this is unfair, but I just like to understand the color. Your $52 Retirement Plan guidance was only given sort of 2 months ago. So to the extent that you're now guiding that down about 5% to 10%, as you just said, does that basically reflect the fact that sort of a target was like one of those things that was already kind of work in progress a couple of months ago? Or is there something very specific that's changed in the past couple of months that you really want to alert us to?

William, yes, maybe on the Dutch mortality, just maybe as a refresher, what we do is we update our long-term mortality expectations based on European mortality, and we do it on a 2-year lag. So what we're reflecting now is there has been basically mortality improvement from 2015 to 2016. I think, as you well know, actually, mortality has gotten a little bit worse in Europe. The flu seasons have increased mortality. So you would expect to see some of that actually come back perhaps in later periods as we continue to update the mortality assumption. In terms of impact on long-term earnings, it's really negligible. This is very long-term business, and this is really fair value liability business for the most part. So it's all taken in a lump sum. To the extent that you would see mortality deterioration, you would see that actually come back in earnings, so that would maybe improve things as we update next year and the year following. In terms of long-term care, you're absolutely right. What we had seen in the experience for the, let's say, for the full year morbidity and the claims experience was pretty much exactly in line with our management best estimate, it was a little bit -- so that was I think very good news. We do our normal updates in the second quarter for the U.S. So that will continue. We'll continue, as we always do, to look at all of our major assumptions to update, but I think one important one is so, for the morbidity improvement, we assume this 1.5% improvement per year for the next sort of 10 years, there has been a study that was being conducted by the NAIC in conjunction with the Society of Actuaries. This has been announced I think like in the late summer of last year, and they had actually expected to get some news out something like around the November time period. They actually completed the study, but it was quite inconclusive. So it doesn't appear that the NAIC is going to come out with any kind of an opinion as to the usage of a morbidity improvement assumption. And so -- and they will continue to monitor experience. So for 2019, I can't imagine sort of regulatory action or big Society of Actuaries type of study that would lead to any kind of different conclusion. I would just reiterate the fact that we still like the assumption and sort of the corollary for what you see in mortality improvement. And again, we've mentioned before, improvements to Alzheimer's disease and that sort of thing as sort of things that are coming down the road for morbidity improvement. So we still embed it in all of our reserving premium deficiency reserve testing and the like. With respect to the $52 per participant, yes, that had been telegraphed at the Analyst and Investor Day in December. It was based on what we had known then for our run rates. But since then, we had a fairly significant market downturn in the last part of the year, and then we had some outflows in big plans toward the end of the year as well. So as I mentioned before, we're going to adjust that down 5% to 10% based on markets at the end of the year, but we've already seen markets recover a little bit. And again, Alex had mentioned that it's been a pretty good sales month for Retirement Plan. So this continues to be an area where we really focus on -- focusing on growing the business, not only in terms of increasing the sort of the fees that we get on that business through managed advice and other ancillary products and services that we attach to that, but also on really driving distribution efforts. So that really needs to be our focus for 2019 is to get that Retirement Plans business clicking again.

Our next question comes from Dave Motemaden from Evercore.

Firstly, a question you had mentioned -- or I guess, firstly, a question on LTC. You've mentioned experience was in line with your best estimate assumptions for the full year. Just wondering how that looked on a statutory basis. Because I know, last year, there were some moving pieces, especially on the claims reserves. I'm just wondering how that looked. Secondly, just in terms of uses of capital after the dividend. Have you given any thought to transferring or looking at risk transfer of long-term care -- of your long-term care book? I guess, what are the chances that you think that this could occur? Is this something you guys are looking at? And then finally, just on the morbidity improvement assumption. If you could give just sensitivity around removing that now that you've changed some of the assumptions in your PDR testing, that would be great.

Okay. So on the long-term care, maybe good to -- yes, you mentioned what has happened on the statutory basis. At this point, the premium deficiency reserve testing has resulted in about a $700 billion sufficiency on that basis. What we have done is we have -- there was some prudency that was embedded within the premium deficiency reserve test. We had haircut that 1.5% morbidity improvement assumption. We had haircut that down to 1%, and now we have removed that prudency. So effectively we have created -- we have created some gap in the premium deficiency reserve testing by going up to the full 1.5%. In terms of uses of capital after dividend and risk transfer of long-term care books, very difficult to do, I would say. It's actually better for us to manage the book as we have been doing. So I think you realize that there have been quite some benefits from putting through premium rate increases. And also you saw historically we had taken advantage of locking in some long-term interest rates using forward starting swaps. So that needs to be our strategy going forward. It's unlikely that we could do some kind of a risk transfer on the long-term care book. In terms of the sensitivity, I think what we have said before was that if we remove the premium -- I'm sorry. If we had removed the morbidity improvement assumption, in total, you would see an IFRS impact of around $700 million. And I think it was the same thing around a statutory basis. And I think it holds today, but I want to come back and confirm it with you.

Got it. And then I guess just statutory experience on long-term care for the year, how is that -- how did that look?

I don't have an update on that one. I think we can get back to you on that one.

Our next question comes from Johnny Vo from Goldman Sachs.

Just a couple of questions. Just coming back to the leverage ratio, you spoke about the actions you're taking, potentially, the growth in shareholder equity, or retained earnings and also debt reduction. Could you give us a breakout or more clarity on how much you propose to actually reduce debt gross leverage as opposed to growing the book value? That's the first question. The second question, it just relates to Cofunds. There's been quite a lot of transfers out of Cofunds. How much are you capturing on your own Aegon platform of those transfers out? Because I think the growth in funds offloads into Aegon platform doesn't quite correlate with the transfers out from Cofunds. And the final question, just a question on the U.S. reserves. What is the realized vol assumption on your U.S. statutory reserves?

Okay. So I'll take the first one. We're not giving any guidance on the amount of debt or hybrids that we are taking out of the market. We just give the general guidance that we'd like to reduce the leverage ratio over time. There is a certain amount of -- so I mentioned that retained earnings, we -- the fact that we do retain earnings, it does get you to the lower end. We have to think about maybe a little bit of further deleveraging, but we don't need to get there. We don't need to do it in order to get down to the lower end in the medium term, let's say. You had asked about what is the realized vol assumption in U.S. stat. That's -- that's all right. I can give you -- how do you want to say it. I think what you're asking is what is the movement of statutory reserves and how is that affected by implied vol. But I think the larger point here is that -- and I think you're referring really to the hedging results for the half-year. We showed this pretty significant, we say, hedging loss on an IFRS basis relative to the macro hedge, but a large part of that is actually due to the fact that the IFRS liabilities are held on an SOP 03-1 basis. And it's like a huge amount. I think the number that we reported for the overall macro loss was something like 468 million. Basically, all of that was the IFRS -- basically the movement in IFRS SOP 03-1 reserves and DAC. And we only had a 30 million payoff, I think, from the macro hedge. And that's the point that we tried to make in the presentation that what matters is the payoff on that macro hedge. And in this case, we were 96 million short as a consequence of implied volatility not coming through the way that it ordinarily would when you see a sharp market decline.

Johnny, let me take the question on the Cofunds outflows. So on Cofunds, we have both retail customers and institutional customers. And as you can imagine, institutional customers is a business that strains a few basis points. What we have seen in the second half of the year is that a few of the very large institutional customers have taken some of their assets away because they wanted to spread their supplier dependency, so effectively taken some away. But from an earnings point of view, it's of very limited impact because it's very low basis points. What I think is important to note is that we have seen actually better retention than we were expecting on our retail side of the business, which is clearly is much higher returns for us, much higher basis points on assets. And therefore, that is the area we will continue to focus most on, on growing our retail part of the business while maintaining a scalable institutional business.

Our next question comes from Andrew Baker from Citi.

So 3 questions. The first one on -- just on the U.S. retirement business again. So I know you're still seeing outflows the same time you're investing in service levels to support future growth. But can you just comment on the current service levels and if there's anything we should be thinking about, concerned about there as it relates to the outflows that you're currently seeing? The second is on the ROE target. So the new ROE target is greater than 10% on the new definition, I believe, which is -- which compares to 10% target on the old definition for the old target. How do you think about how those two reconcile? And is there actually a step down in the ROE target here? And if so, what really drove that? And third, I saw you had -- just on unclaimed property, I saw there was a small increase in provision in the U.S. Is there anything we should be thinking about sort of why there are industry concerns around unclaimed property just because I haven't seen it come up for a couple of years now?

Let me take the first part of the question. What we have seen is that we needed to make some investments -- further investments, in particular in our engagement with the plan sponsors. A lot of our resources actually was being devoted to execute on the Mercer integration, so we have integrated the Mercer customers that we acquired. And it's clear that, in that period of time, our focus on the IT technology was to get that done, and we now need to catch up in providing and improving service levels. It's an ongoing movement. It's like a train that keeps on going. So it's really about further increasing and making sure that our service levels are providing us a competitive position. The second thing we're doing in the retirement business, and this is why we have a unique offering, is that we have a combined retirement offering and a supplemental health benefit in the same environment, and that makes us unique. What we also want to focus on is deepen the scope of our Managed Advice, not only for people that are retiring, but also for people that are in plan. So these are all steps we are taking to take our service levels to the level where it needs to be and to make sure that we are at the front of it. And the Mercer acquisition now being behind, we are able to dedicate all our resources there. In terms of return on equity target, I think it's important to note also, and it was mentioned in the context of the leveraging or potential deleveraging, is that we have a significant amount of returned earnings, which affect our return on equity going forward. So we wanted to make sure that we had a target that is more like a minimum target. So we're not saying that we target 10%. No, we say we need to have at least 10% taken to count the fact that half our earnings are effectively retained and the other half is paid out in the form of the dividends. And in terms of the unclaimed property, Matt, is there anything you would like to add here?

Yes, I can take that one. There's actually -- you can think of it as a third-party administrator that is working with states to basically compare their records with what's called the -- it's the Social Security Death Master File, basically to identify people that have passed away and understanding through the -- through our own data, if claims haven't been filed and we can't find a beneficiary, we reach a settlement with the states to put them into what is called [sgeit] -- so basically these are contracts for which we were holding a liability, an IFRS liability, but due to the fact that they have passed away, and we had made this arrangement with a third-party administrator acting on behalf of the states, then we're effectively accelerating the death claim payment and paying the state. And that's where the 32 million comes in. It relates to life insurance claims, not payout pensioner or payout annuity benefits. We have liabilities already on the books for this. So you can think of it as an acceleration of the death benefit payment to people that have passed away and we didn't know it.

We will now take our last question from Steven Haywood from HSBC.

Just wondered if you can give me an update on the progress you are seeing on refinancing your grandfathered debt instruments. How is that progressing? What further things need to be done and whether there's optionality to rather than refinance to redeem in the future as well. And then I remember your FCC target was around 6% to 8%. Is this still in place? And can you give me an updated FCC ratio at the moment? And finally, on Vivat, is that still a file in focus for you? And is it a file in focus in the whole or in part? I mean would it be interesting to you as a whole business or in just parts of the business?

With respect to the refinancing, so maybe just as a review, we have about EUR 2 billion of restricted Tier 1 that needs to be refinanced, but we're really in no rush to do so. This had been grandfathered securities at the implementation of Solvency II in 2016. So these are grandfathered for a period of 10 years. So we don't feel like we're in a rush. We have all the work done to go to issue into the markets. There's no restriction or anything on us doing so, but we want to make sure that we hit the markets in the right time. So basically, we're just trying to find a good spot in the markets to minimize our costs. And like I said, there's no real rush to do it. But we'd like to get an issuance in -- I think the first one within this year, given good market circumstances. On the second one, we're puzzling a little bit as to the FCC ratio. We don't know what that one is. So you can maybe clarify that in a moment. But in the meantime, maybe Alex can talk about Vivat.

Sure. So we have expressed an interest in looking at Vivat because Vivat is an existing opportunity in our key home market so it goes without saying that we should have a look at it. In terms of how we would look, what parts we would look at it, at this point in time, the only thing I would like to say is that we should be looking at all options, and it's really early in the process now. I think information memorandums actually has just gone out 10 days ago. So we'll see how that whole transaction is progressing. We'll have a look at it, but I want to remind all of you that there is no need from a strategic point of view, we have significant scale in the Netherlands, but if it makes sense from a commercial point, financial point of view, if we can increase scale in certain areas that are of interest, then we should certainly look at it. Do we know in the meantime what FCC means?

FCC is the fixed charge coverage.

Fixed charge coverage. Tell me what your question was with respect to that one.

Is the target range still 6 to 8x? And where are you currently?

I have to get the number. I don't have it in front of me, but I think it's -- it's about 8x, and there's no change to the target.

Thank you. There are no further questions in the phone queue at this time. I would like to hand the call over back to you Mr. Weidema for any additional or closing remarks.

Well, thank you for listening in for what is slightly longer than usual, and I look forward to see some of you this evening in London. Have a great day. Bye-bye.

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.