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Dilutive

Rights Offering
l
h
ff
WHY HIGHFIELDS CAPITAL IS VOTING NO
TheinformationinthispresentationrepresentstheopinionsofHighfieldsCapitalManagementLP("Highfields"). Thecontentsofthispresentationarenotdirectedatanypersoninanyjurisdictionwhere(byreasonofthatpersonsnationality,residenceorotherwise)thepublicationor
availabilityofthepresentationisprohibited. Thepresentationdoesnotconstituteaproxysolicitation,anofferorarecommendationtobuy,sellordisposeofanyinvestment,toengageinanyothertransactionortoprovideanyinvestmentadviceor service. Highfieldsisnotacting,nor
doesitproposetoact,inconcertwithanyothershareholderinconnectionwiththemattersdescribedherein. Highfieldshasobtainedtheinformationprovidedinthepresentationfrompubliclyavailablesourcesthatitconsidersreliable,butitcannotguaranteeitsaccuracyor
completeness. Exceptwhereotherwiseindicated,thepresentationspeaksasofthedatehereofandHighfieldsundertakesnodutytoandwillnotupdatethepresentationinlightofnewinformationorfutureevents.
Nothinginthispresentationisintendedtoconstituteafinancialpromotionforthepurposesofsection21oftheFinancialServicesandMarketsAct2000("FSMA").Totheextentthatanymaterialinthispresentationmayamounttoafinancialpromotion undersection21FSMA,itisbeing
madeonlytoandisdirectedonlyat(i)personsintheUnitedKingdomhavingprofessionalexperienceinmattersrelatingtoinvestments,beinginvestmentprofessionalswithinthemeaningofArticle19(5)oftheFinancialServicesandMarketsAct2000(FinancialPromotion)Order2005,as
made
only to and is directed only at (i) persons in the United Kingdom having professional experience in matters relating to investments being investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 as
amended(the"FPO"),(ii)highnetworthcompanies,unincorporatedassociationsandotherbodiesintheUnitedKingdomwithin themeaningofArticle49(2)oftheFPO,and(iii)personstowhomthepresentationmayotherwiselawfullybemade(together"RelevantPersons").This
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About Highfields Capital


Who We Are:

ABostonbased,longtermvalueinvestmentfirm
with~$12Binassetsundermanagement
ith $12B i
t
d
t
Afirmwitha17+yeartrackrecordof
compoundingcapitalforourinvestors,working
closely,andbehindthescenes,withpublic
company managements to help maximize
companymanagementstohelpmaximize
shareholdervalue
Averageholdingperiodof35years
ExtensiveexperienceinvestinginEuropean
financial sector
financialsector
FirstinvestedinDeltaLloydin2013
Wesubstantiallyincreasedourinvestment
startinginAugust2015andnowownover
p y
9%ofthecompany
Webelievestronglyinthelongtermvalue
ofthisbusinessforitspolicyholders,
employeesandshareholders

Who We Are Not:

Activists

Highfieldshasnotbeenlookingforadispute
withDeltaLloydmanagement,buttheir
actionsaresodetrimentaltoshareholdersand
theirExecutiveandSupervisoryBoardsso
unresponsivetoourprivateconcernsthatwe
arecompelledtopubliclyvoiceouropposition
tothisrightsissue,pointouttheflawsin
managementsapproach,andprotectthe
value of our investment
valueofourinvestment

Th f ll i
The following slides will lay out out the reasons to vote No
lid
ill l
t t th
t
t N
2

Executive Summary
y

Management is Needlessly Diluting Shareholders


Delta Lloyd is a great company with hardworking,
dedicated employees
Unfortunately,sinceHansvanderNoordaabecameCEOinJanuary2015,thevalueofthecompanyhasplummeted
nearly70%

Why Vote No?


Why Vote No?
I.

II.

DeltaLloydisadequatelycapitalizedtodayandforitsfuture

Doesnotneedtobecomeovercapitalizedlikesomeofitspeers

E
Eveninaseverescenario,DeltaLloydwillstillbesufficientlycapitalized
i
i D lt Ll d ill till b
ffi i tl
it li d

Managementisputtingforthaseriesoffalsecrisesandassumptionstojustifythiscapitalraise

Theireffortistoforceshareholderstoacceptdilutionthatonlyservestomaketheirjobseasier

III. ShareholdersbenefitbyvotingNo

Sellingequitytopayadividendbacktoshareholdersiscircular

Sellingunderpricedequitytorepayzerocostcommercialpaperismismanagement

I. Delta Lloyd is Adequately


Capitalized Today
Capitalized Today

Management Should Create Value for Shareholders, Not Compete to Have


the Highest Capital Ratio
Peer companies and managements earlier statements make it clear that
a Solvency II ratio above 150160% is unnecessary
Managementss pursuit of a 180% ratio hurts shareholders
Management
pursuit of a 180% ratio hurts shareholders

TheDNBrequiredVIVAT(SNSReaals
insurance entity) to have a Solvency II
insuranceentity)tohaveaSolvencyII
ratioof150%whenitwasacquiredby
AnbangInsuranceGroupinJuly2015

AEGONhasaSolvencyIIratioof~160%
under the Partial Internal Model (would
underthePartialInternalModel(would
belowerundertheStandardModel)and
feltsufficientlyovercapitalizedto
announcea400millionsharerepurchase
withatleasthalftobecompletedinQ1

a.s.r.referstocapitallevelsinexcessof
140%asthecashdividendpaymentlevel
%
p y
andabove160%asentrepreneurial (1)

Managementhasconsistentlysaidarangeof140180%isadequatebutnowtargetsthetopendoftherange(2)
However,sincetheywillreceivePartialInternalModelapprovalinthenearterm,managementshouldcurrently
be targeting the lower half of the range
betargetingthelowerhalfoftherange
(1)
(2)

a.s.r. presentation: a.s.r. capital management considerations. Slide 11. November 2015.
Delta Lloyd Full Year 2015 Analyst Call. Slide 20. February 24, 2016.

Delta Lloyds Solvency II Ratio Will Be ~155160% Without


a Capital Raise
DeltaLloyd2016ESolvencyIIRollForward

A.
B.
C.
D.

G.

B. LACDT:Despitemanagementsvaguethreatsofthe
p
g
g
consequencesofshareholdersrejectingtherightsissue,we
donotbelievethedisallowanceoftheLACDTwillcostmore
thananadditional~5pts
C. EQUITYTRANSITIONALS:Thephaseoutofcertainequity
transitional arrangements will cost 2pts
transitionalarrangementswillcost2pts
D. VANLANSCHOT:Divestiturewilladd~8pts
E. MANAGEMENTACTIONS:SolvencyIIbalancesheet
optimizationwilladdatleast1015pts

E
E.
F.

A. LONGEVITYSWAPS:Assumehalfoftheloss(=7pts)related
toDNBschangedtreatmentofDeltaLloydslongevityswaps
willbeaddedbackasmanagementrestructurestheswaps

F. ORGANICCAPITALGENERATION:Assume200250mm
basedonexcessivelyconservativemanagementguidance
G. PARTIALINTERNALMODELAPPROVAL:Managementhas
saidendof2017butshouldbesoonergivencompetitors
have received approval, and Delta Lloyd has been intensely
havereceivedapproval,andDeltaLloydhasbeenintensely
workingontheprocesssince2012(SeeAppendixA)

Even in a Harsher Regulatory Environment,


Delta Lloyd Will Be Healthy Without a Capital Raise
Management claims that the excessive capital is necessary in case European
regulators reduce the Ultimate Forward Rate (UFR) from 4.2% to 3.2% without
a transitional period Management is overstating the risk
a transitional period. Management is overstating the risk
Amovementfrom4.2%to3.2%...isveryunlikely.Imsurethatthiswillnothappen.TheGermanCentralBankhas
justreleasedapaper,testifyingthata4.5%longterminterestrate,usedforGermanaccountsforthelocalpension
plans...isfor[a]longtermassumption,quitesensible.
p
[ ]
g
p
,q
DieterWemmer,AllianzChiefFinancialOfficer(November24,2015)

Affects of Adverse Regulatory Outcome


180%
160%

155160%

(33%)
~10%

(4%)

>140%

1015%+

140%
120%
100%
2016ES2ratio

(1)

UFRlowered PartialInternal 2017Eorganic(2) Dividend


((no
Modelapproval
pp
capital
p
transitionals)
generation
(1)
(2)

2017ES2ratio

Even if the UFR is lowered to


3.2% without a transitional
period, as long as management
prioritizes approval of the Partial
Internal Model, Delta Lloyds
year-end 2017 Solvency II capital
ratio will still be >140%, adequate
to pay cash dividends

Partial Internal Model approval should have a greater than 1015 point impact, particularly if the December 2015 longevity swap disallowance is not fully
reversed as longevity assumptions are materially less severe under the Partial Internal Model.
If the UFR were lowered without a transitional period, Delta Lloyds ongoing capital generation capacity would immediately increase by an estimated
3040 million.

Regulator Is Not Requiring the Capital Raise


According to CEO
DNB did not require the proposed capital raise
February2,2016InterviewwithNRC(DutchNewspaper) Translated(1)
NRC:
Didtheregulatorexertanypressuretoset[thecapitallevels]sohigh?
HansvanderNoordaa,CEO:
No. Itisourownassessment. Youlistenwell,ofcourse,toallstakeholders. Butwedetermineourowncourse.Asweshould

According to DNB
Bulletin from the DNB confirming that Dutch
insurers are sufficiently capitalized under
Solvency II as of the end of 2015 (Translated,
Emphasis Added)
DutchinsurersarewellpreparedforSolvencyII andmake
relativelylittleornouseofthesetransitionalmeasures.The
Netherlandsappliesinthatrespectafairlypureformof
SolvencyII.InsomeEuropeancountries,transitionalmeasures
usedareusedonafairlylargescale(2)

(1)
(2)

Notes summarizing DNB meeting in


Amsterdam with sellside analysts on
February 11, 2016
KBCSecurities:
TheDNBneverthelessstressedseveraltimesthatthesizeof
themanagementbufferisalsolargelyaninternaldecision
(based on internal risk appetite)
(basedoninternalriskappetite)
RabobankSecurities:
The100%solvencylevelisthenewbaseinSolvency2
(meaningitisnotthat200%inSolvency1hastobenow
200%inS2)understandablethatinsurerswantsomebuffer
abovethis100%level,butthatisuptothespecificunsurer
,
p
p f
[sic]todecide

http://www.nrc.nl/next/2016/02/02/wijvragenveelvanonzebeleggers1583719
http://www.dnb.nl/nieuws/nieuwsoverzichtenarchief/dnbulletin2015/dnb335114.jsp

II. Management is Using a Series


of False Crises and Assumptions
of False Crises and Assumptions

10

Management is Using Draconian Assumptions


Area of Concern

Capital adequacy
Capital adequacy

Managements Argument

Objective View

Oursolvencyratioistoolow

Solvencyratioisadequatenowandwillimprovein2016/2017both
organicallyandviamanagementactions

We
Wehavetoomuchsensitivityto
have too much sensitivity to
marketmovements

Q1
Q1marketmovementshaverevealedtheresilienceofDeltaLloyds
market movements have revealed the resilience of Delta Lloyds
SolvencyIIcapitalposition,notweakness

Regulatoryrisk

Noregulatoryrequirementforacapitalincrease
Delta LloydoperatesprimarilyinasinglegeographyanditsHoldCoand
operatingentitiesshareacommonregulator

OurHoldColiquiditypositionisweak

Holding company
liquidity and leverage

Poorhistoryofremittances

DeltaLloydhasalwaysrunwithnegativecashandits
currentpositionisashealthyasithaseverbeenpostIPO

Weneedtobuildatargetcashbuffer
attheHoldCo

SignificantamountofHoldCocashflowobligationsarecontractual
passthroughs
LifesubsidiariesnowwellcapitalizedsodividendstoHoldCowill
increase

Capital generation
ability

Partial Internal
Model timing

Capitalgenerationisweakerthan
anyoneexpected

Managementsuseofexcessivelyconservativeassumptionsservesto
understatecapitalgenerationsignificantly
Ignores bank earnings and presence of deferred tax assets among other
Ignoresbankearningsandpresenceofdeferredtaxassetsamongother
items
Peermodelshavebeenapproved;consultants canbehiredtoshare
bestpractices

Byendof2017

Companyhasbeenworkingoninternal modelsince2012
C
Companycontinuestouseinternalmodelforeconomiccapital
ti
t
i t
l
d lf
i
it l
purposes(1) theirmodelcannotbethatbad

(1)

See Delta Lloyd Extraordinary General Meeting of Shareholders, p. 19. February 1, 2016.

11

Delta Lloyd Even Admits that Highfields Earlier Objections to its Assumptions
Were Correct, But Stubbornly Clings to Other False Arguments
Highfields
Original Criticism

Delta Lloyds
February 24 Response

Management should
further optimize Solvency
II balance sheet before
raising equity

Additional1015pointsfromfurther
ALMactions(beyondVanLanschot
saleandQ4actions)

Continued Areas of Frustration


Roomformoreaggressivederisking:MakingDeltaLloyds
bondportfoliolookmorelikeNNswouldgenerateupto20
pointsofcapital
DNBreversedtheirpriorapparentapproval(1) oflongevity
hedgescostingDeltaLloyd14pointsofcapital.AEGONalso
useslongevityhedgesandhasnotdisclosedasimilar
regulatoryaction.Whythedifference?

LACDT risk overblown

LACDTresolutionatcostofonly2
pointsofcapital

Management threateningshareholdersthatavoteagainstthe
rightsissuecouldresultinahittocapitalinexcessof2points,
butrefusestoquantifyhowmuchmore(weestimatelessthan
5points)ordisclosetheminimumcapitalraiserequiredto
keepcurrenttreatmentofLACDT

1 billion capital raise


and resulting dilution is
excessive

Cutcapitalraiseto650million

Even650 millioncapitalraiseandresultingdilutionis
unnecessary

Managementincreasedguidanceto
53bpsofexcessspread

(2) of netinvestmentincome
Despiteanadditional~25million
p
andthebanksstrong2015pretaxearningsof55million,
capitalgenerationguidanceisunchangedat200250million
becausemanagementoffsetthesepositiveswithnegative
assumptionsinotherareasincludingincreasingthetaxrate
andassumingthebankcontributesnofutureearnings

Management assumption
of 45 50 bps of excess
of 4550 bps of excess
spread is too low, and
bank earnings are well in
excess of managements
guidance of 15 million

(1)
(2)

Financieele Dagblad. Oudtopman Delta Lloyd haalt uit naar DNB. February 25, 2016. http://fd.nl/beurs/1140999/niekhoekhaaltuitnaardnb
Updated management guidance versus previous guidance of 4550 bps .

12

Management is Now Changing the Rights Issue Capital Rationale into a Holding
Company Liquidity and Leverage Issue, But This is Also a False Argument

Delta Lloyd has always


run with negative net
cash
h (1) whats so
h t
different now?
Negativenetcashisclosetoalltimelows
sincetheIPOandwillbeevenloweronce
th
theannouncedprivateequityandVan
d i t
it
dV
Lanschotsalesarecompleted

Delta Lloyd HoldCo Historical Negative Net Cash


( inmillions)

2008

2009

2010

2011

2013

2014

2015

(200)

(~155)

(300)

(245)

(400)
(500)

(344)

(313)

(358)

(469)

Delta Lloyd is a simple insurance company with limited need for


Delta
Lloyd is a simple insurance company with limited need for
separate holding company liquidity
TheHoldingCompanyhassufficientcashflowtomeetitsobligations
Holdingcompanyfinanceandtaxobligations:Majorityarepassthroughsfrom
operatingsubsidiaries

Generalinsurance,assetmanagement,andABNAMROJVs:Consistentsourcesof
holdingcompanydividends

Lifeandbanksubsidiaries:Nowfullycapitalizedandshouldbesourcesof
significantholdingcompanydividendsin2016;mainlifesubsidiarylegallyableto
distributedividendstoholdingcompanyaslongasSolvencyIIratioisabove100%

(431)
(526)

(553)

Cash & equivalents


Credit on demand
Net cash as of 12/31/15
Private equity liquidation in Q1
10.5% stake in Van Lanschot
Deferred payment from PE liquidation
Pro forma net cash

8
(321)
(313)
29
82
47
(155)

Capitalfungibilityisnotasubstantial
issueforDeltaLloyd.Thevastmajority
ofouroperationsareinthe
Netherlands,sowedonotfacethe
difficulty of multiple jurisdictions
difficultyofmultiplejurisdictions
AnnemarieMijer
DeltaLloydChiefRiskOfficer
(November30,2015)

Theholdingcompanyhasnettangibleequityof~2.4bn(3)

(1)
(2)
(3)

(2)

(100)

(600)

2012

ProForma
2015

Negative net cash defined as credit on demand less cash and cash equivalents from Delta Lloyds Separate Financial Statements in Delta Lloyd Annual Reports.
Sale of one remaining private equity security (29.2mm) expected to be finalized in Q1 2016 and deferred payment of 46.7mm related to the sale of a part of the
private equity portfolio to be settled within two years.
Delta Lloyd 2015 Annual Report.

13

Managements Other Concerns Do Not Justify a Dilutive Capital Raise

Management Argument

Reality
DeltaLloydisnotamaterialuserofdebtmarkets

Additional capital is
required to prevent a
ratings downgrade
ratings downgrade

Thenextmaturityisa575millionnotedueinNovember2017thatisstilltradingabovepar
despitetheuncertaintyaroundtherightsissue

Thenextandonlyothermaturityisnotuntil2042

DeltaLloydsbusinessisnotmateriallydependentonitscreditrating

Managementhascorrectlydeemphasizedthelargecorporatedefinedbenefitbusinesswherea
creditratingcanbeimportant

Companynowfocusesonsmallerdefinedbenefitbusinessandincreasinglythecapital
lightdefinedcontributionbusinesswhereacreditratingisnotasimportant

A100%SolvencyIIratioimpliessufficientcapitalfora1in200yearevent.DeltaLloyd
runssignificantlyinexcessofthislevelundertheStandardFormulaandcapitalratio
willgrowfromhere

Additional capital is
q
p
required to protect
against uncertainties

Dilutingshareholdersisexpensivedisasterinsurance.Ifmanagementwantslessrisk, itisless
expensive to further de risk the investment portfolio
expensivetofurtherderisktheinvestmentportfolio
Delta LloydsSolvencyIIcapitalratioappearsresilienttomarketshocksas Q1marketmovementshave
leftthesolvencypositionnoworsethanmodestlylower(1)

(1)

Delta Lloyd Full Year 2015 Analyst Call. February 24, 2016.

14

III. Shareholders Benefit


by Voting No
by Voting
No

15

Management Wants You to Vote Yes

but management has the wrong incentives and a poor track


record

DeltaLloydmanagementhasnoeconomicalignmentwithshareholders;
l l d
h
l
h h h ld
CEOHansvanderNoordaadoesnotownasingleshare(1)

Itiscertainlyinmanagementsintereststoraiseequityandovercapitalizethecompanyasitallowsthemto:

Avoidmakinghardchoices,suchasmoreaggressive
derisking

Declarevictorybypayingorincreasingdividendswith
shareholdersownmoney
shareholders
own money

SincehebecameCEOinJanuary2015,DeltaLloydsharesare
downalmost70%,(2) makingittheworstperforminginsurance
stockinEuropeandtheworstperformingstockintheAEX

WilldilutionfromaYesvotebeevenworsethanexpected,
giventhatmanagementhastherighttothenissueanother10%
ofshareswithoutshareholderapproval?(3)

(1)
(2)
(3)

Delta Lloyd 2015 Annual Report.


Per Bloomberg, as of February 29, 2016. Delta Lloyd has underperformed the STOXX 600 Optimised Insurance Index by 67% and the AEX Index by 70%.
In March 2015, Delta Lloyd issued 338 million of equity without shareholder approval and then received authorization at the 2015 AGM permitting the issue of new ordinary shares
representing another 10% of the issued share capital. A 650 million rights issue and the current market capitalization implies management could then issue an additional ~190 million of
equity post rights issue.

16

Significant Upside if Management Proposal is Rejected


Shareholders are better off if this unnecessary capital raise is rejected
Management Capital Generation Guidance
ProposalAccepted

( inmillions)

(1)

ProposalRejected
(1)

Highfields
Estimate
Proposal
Rejected

~350

AnnualCapitalGeneration

~225

TradingMultiple

10x

10x

EquityValue

2,250

2,250

RightsOffering

(650)

AdjustedEquityValue

1,600

2,250

CurrentSharesOutstanding

228

228

228

FairValueperShare

7.03

9.89

15.38

5.76

5.76

5.76

22%

72%

167%

CurrentSharePrice
%Upside

(1)
(2)

Midpoint of management guidance.


As of February 29, 2016.

(2)

~225

10x
3,500

3,500

17

Why Highfields Believes Capital Generation Exceeds


Management Guidance
Management Guidance

Old: Nov. 30

New: Feb 24

Highfields View

4550bps

~53bps(1)

MarketyieldsfromBloombergsuggestexcessspreadisgreaterthan60bps.(2)
Adds~25million

B. Financing costs

~120million

123million

SolvencyIIinterestexpenselowerthancashinterestexpensebecauseoffset
ofdebtbeingmarkedaboveparinSolvencyIIcapitalcalculationisreduced
interestexpense.Adds~10million

C. Excess spread tax rate

10%(3)
EffectiveRate

27.9%
StatutoryRate

Statutoryrateignorespresenceofdeferredtaxassets.Adds~25million

D. Bank earnings

~15million(3)

Zero
(noHoldCo
dividends)

Thebankearned~40millionin2015andisfullycapitalized.Allearnings
goingforwardshouldbeavailableforHoldCodividends

Roughlyzero

Roughlyzero

4050million(3)

30million

A. Excess spread

E. Value of life new


business (net)
F. Unwind of risk margin

AsproductionmixshiftstowardstowardDCproductandfiveyearextension
periodfornegativemarginDBbusinessrollsoff,capitalgenerationshould
improve dramatically
improvedramatically
Whatchanged?

Delta Lloyd Solvency II Capital Generation Power


( inmillions)

400

~40
~25

300
~25

200250

~10

k
bl b
Unknowablebut
materially
greaterthan
zeroovertime

1020

>310370

200
Management A. Excessspread B. Financingcosts C. Excessspreadtax D.Bankearnings E. Valueoflifenew F. Unwindofrisk RealisticS2capital
guidance
rate
business(net)
margin
generation
(1)

(2)
(3)

Pretax excess return of ~223mm on 41.7bn of invested assets. Please see slide 29 of Delta Lloyd presentation FY 2015 results and capital plan update.
See Appendix B.
The company never gave a public quantitative buildup but provided sellside analysts with inputs for their capital generation guidance. We are using a Goldman
Sachs (Delta Lloyds advisor) research note from December 3, 2015.

18

Shareholder Rejection = All Good Outcomes

No Rights Offering
No Rights Offering

Sale
Sale

Gradual Runoff
Gradual Runoff

Adequatelycapitalized;capitalwill
continuetogrow:organicallyand
throughmanagementactions

Capitalgenerationpersharewillbe
materiallyhighergivennodilution(~1
1.50/share)(1)

Thecompanyisadequately
capitalizedsothealternativesto
arightsofferingarenotasaleor
arunoff

However,eveninarunoff,the
companyisworthsignificantlymore
thanitscurrentsharepricegiven
IFRSbookvaluepershare(~11),
AdjustedSolvencyIIUnrestrictedTier
1 own funds per share (~10)
1ownfundspershare(
10),((2)) or
or
DeltaLloydsownestimateofits
intrinsicvaluepershare(~18)(3)

Portionofacquisitionpricecanbe
financed(i)bymovingDeltaLloydonto
acquirersPartialInternalModeland(ii)
throughPVoffuturesynergiesthat
S l
SolvencyIItreatsasimmediatecapital
II
i
di
i l

Giventhesecapitalsynergiesan
acquisitionwouldbehighlyaccretiveona
FCF/sharebasis

Impliesstockworth~10/share(if
managementcapitalgenerationis
correct)to~15/share(ifHighfieldsis
correct)

(1)
(2)
(3)

Buyercanpayamaterialpremiumgiven
accretionfrompurchasingacompetitor
atadiscounttoAdjustedSolvencyII
UnrestrictedTier1ownfunds(2) (DL
currently trades at a ~40%
currentlytradesata
40%discount)
discount)

Assume 225 million (midpoint management guidance) to 350 million (Highfields estimate) and 228 million shares.
Defined as Unrestricted Tier 1 own funds of ~2.0bn and bank equity of ~0.2bn.
As of June 30, 2015. Delta Lloyd has not yet published its yearend Embedded Value report.

19

Do What Goldman Sachs Does (Not What They Say!)


Goldman Sachs is Delta Lloyds lead advisor;
however the advice they are providing their client is the opposite of how
they approached their own capital situation
they approached their own capital situation

Goldmanhasfacedrevenueheadwinds,significantregulatoryuncertainty,andavolatilemacroeconomicenvironment

Asofthesecondquarterof2012,GoldmanSachsBaselIIITier1CommonRatiowasslightlybelow8%(1)

WhileGoldmandidnotknowthatitultimatelywouldeffectivelyneedaratioabove12%,
y
y
%,(2) itsmanagementknewthatits
g
capitalrationeededtoimprove(asituationnotunliketheoneinwhichDeltaLloydcurrentlyfindsitself)

GoldmanSachscouldhavefollowedtheadviceitisgivingDeltaLloydandincreaseditsratiotogreaterthan12%immediately
viaa~$30billioncapitalraise(Goldmansmarketcapitalizationatthetimewas~$50billion).Instead,becauseGoldmans
managementarealsosignificantshareholders,Goldmantookthecorrectapproachandoptimizeditsbalancesheet,grew
capitalorganically,andrefusedtodiluteitsshareholders.DeltaLloydmanagementshoulddothesame

Sincethebeginningof2012GoldmanSachshasincreaseditsTier1CommonRatioto>12%,whilereturning$25billion
toshareholdersanddecreasingitssharecountby14%!(3)

WearecertainthemanagementteamatGoldmanSachs(significantshareholdersoftheirownstock)isgratefulthattheydid
notfollowtheadvicetheyaregivingDeltaLloyd
t f ll th d i th
i i D lt Ll d

It is amazing what happens


when management is
economically aligned
economically aligned
with shareholders
(1)
(2)
(3)

Ourorganizationremainsintenselyfocusedonmaximizingrisk
adjustedROEsthroughthecycleforthebenefitofourshareholders
GaryCohn,GoldmanSachsChiefOperatingOfficer(May31,2012)

Goldman Sachs Q2 2012 earnings call for fixed income investors. July 24, 2012.
Current standardized Basel III Tier I common ratio of 12.9% per Goldman Sachs 2015 10K.
Goldman Sachs Presentation at the 2016 Credit Suisse Financial Services Forum. P. 4.

20

Conclusion

DeltaLloydisnot inneedofmorecapital

Managementsrationaleforthiscapitalraisecannotwithstandscrutiny

Valuewillbecreatedthroughbettermanagement,notshareholderdilution

HighfieldswillvoteNo

Contact Info
EmailAddress:
MailingAddress:

DeltaLloydInfo@highfieldscapital.com
HighfieldsCapitalManagement,LP
Re:DeltaLloyd
200ClarendonStreet
Boston,MA02116

21

Appendix
pp

22

APPENDIXA

Partial Internal Model Guidance is Too Conservative


Delta Lloyd should receive approval before year end 2017, and the capital
uplift will be greater than 1015 points

Timing

Management
Guidance

Highfields
Response

Suggest
Suggestre
restarting
startingthe
the
processisnecessary
andtwomoreyears
requiredforapproval

DeltaLloydhasbeenworkingoninternal
y
g
modelapprovalsinceatleast2012
Multiplecompetitorshavealreadyreceived
approval:AEGON,NN,Achmea
Comparable
Comparablelifepeershaveexperienced
life peers have experienced or
or
expect moreofanuplift:

Quantity

1015pointsbased
onOliverWyman
assessment

NNsPartialInternalModelapproval
added33pointstotheirSolvencyIIratio(1)
a.s.r.sinternalmodel,ifapproved,would
add~20pointsofSolvencyIIcapital(2)

Theinternalmodelapplication
processhasbeengoingon
forthreeyearsalready...Weare
atleastabove20,000pages
whichwehavealreadyprovided
totheregulators
TheoBerg
(former)DeltaLloydDirector
GroupActuarial&Risk
Management
(November21,2014)

Delta Lloyd can anticipate a material increase in its capital ratio in the
not too distant future
(1)
(2)

NN Group press release: NN Group receives approval to use its Partial Internal Model for Solvency II. December 21, 2015.
a.s.r. Annual Results 2015 Analyst call. February 18, 2016.

23

APPENDIXB

Updated Excess Spread Guidance Still Conservative


HighfieldsbelievedmanagementsoriginalNovember30excessspreadguidance(4550bps)wasoverlyconservativegivenDelta
Lloydsactual investmentportfolioandtoldthemsoinDecember
UsingmarketyieldsasofSeptember30andDeltaLloydsinvestmentportfoliodisclosures,ourbottomupestimateof
Delta Lloydssexcessspreadwasgreaterthan60bps,orapretaxdifferenceof
DeltaLloyd
excess spread was greater than 60 bps or a pretax difference of ~60
60million
million versuspriorguidance
versus prior guidance((1))
OnFebruary24,managementpresentednewguidanceforexcessspreadof~53bps(2)
Managementsnewdisclosures,whilemoregranular,continuetohaveinconsistencies
Forexample,thedisclosedexcessspreadforDeltaLloyds~30bnfixedincomeportfoliois57bps,whichimpliesa
d
durationof~10years
i
f 10
tooshortforDeltaLloydsactualportfolio,
h f D l Ll d
l
f li (3) implyingthedisclosedgrossyieldistoolow.Prior
i l i
h di l d
i ld i
l
Pi
(4)
disclosuresshowedthatthefixedincomeportfoliohadadurationof~15years
Becauseoftheseinconsistencies,ratherthanfollowingmanagementsnumbers,Highfieldscontinuestouseitsbottomup
analysis(asupdatedforyearenddisclosures),whereweusethesimpleapproachofseparatelyexaminingthecompanys
investmentincomevs.costoftheirliabilities,bothmarkedtomarketperBloombergasof12/31/15(seenextslide)
,
p
g
/ / (
)
Wecontinuetocalculate>60bpsofexcessspreadorinexcessof~25millionofadditionalcapitalgenerationversus
managementsupdatedguidance(5)
Despitelowinterestrates,asthecompanyisallocatingtoamoreconservativeinvestmentportfolio,itispickingupcomparableor
betteryieldsbymovingawayfromlowerratedcorporatebondsandinvestinginlongdatedresidentialmortgages(newyieldsof
2.30%to3.65%) (6) whichalsohaveasignificantlylowercapitalcharge
(1)
(2)
(3)
(4)
(5)
(6)

Versus the midpoint of prior guidance of 4550 bps of excess spread on 42bn of invested assets.
Pretax excess return of ~223mm on 41.7bn of invested assets. Please see slide 29 of Delta Lloyd presentation FY 2015 results and capital plan update.
Following Delta Lloyds approach for calculating reference rates on its equity portfolio per slide 29 of their FY 2015 presentation: 4.81% 3.44% 0.06% = 1.31% or 13Y point on the swap curve as of
12/31/15. Using a similar approach for the fixed income portfolio gives a reference swap rate of 1.02% (1.65% 0.57%
12/31/15. Using a similar approach for the fixed income portfolio gives a reference swap rate of 1.02% (1.65%
0.57% 0.06%). 1.02% was the 10Y point on the swap curve as of 12/31/15.
0.06%). 1.02% was the 10Y point on the swap curve as of 12/31/15.
Delta Lloyd presentation: Sailing Through Difficult Times, slide 12, March 18, 2014.
Aftertax capital generation using Delta Lloyds new tax rate guidance of 27.9%. ~35 million pretax.
See Delta Lloyds bank website for current mortgage rates: http://www.deltalloyd.nl/hypotheek/hypotheekrente/rentedriesterrenhypotheek.jsp. Range is reflective of 10 to 20 year nonNHG mortgages
with LTVs below 100%.

24

APPENDIXB
(Continued)

Highfields Approach
Annual
Balances
YTM
Income
( in billions) 12/31/2015 ( in millions)
Sovereign bond portfolio
Netherlands
Germanyy
Austria
Belgium
France
Spain (net of CDS)
Italy (net of CDS)
Total sovereigns (1)
Sub-sovereign bond portfolio
European Investment Bank
European Commission
Other sub-sovereigns (2)
Total sub-sovereign bond portfolio (1)
Total sovereigns and sub-sovereign bond portfolio
Corporate fixed income securities
Rabobank
AA-rated
A-rated
BBB and below
Total corporate bond portfolio (3)
Total fixed income portfolio
Mortgages (4)
Equity (4)
Property (4)
Hedge funds/alternatives (4)
Gross investment income (A)
Required interest life (5)
Required interest income and protection(6)
Unwind of UFR (pre-tax) (7)
Total cost of liabilities under Solvency II (B)

Net investment income (A-B)


Excess spread on $42bn investment portfolio
New Delta Lloyd guidance
Pre-tax difference vs. new guidance
Effective tax rate
After-tax difference vs.
vs new guidance
Highfields conservative rounding down

3.1
3.1
2.2
1.8
1.7
0.8
0.6
13.4

1.23%
1.08%
1.33%
1.47%
1.40%
2.25%
2.06%
1.37%

38
33
29
27
24
19
13
183

1.0
08
0.8
4.2
6.0
19.4

1.38%
1 44%
1.44%
1.40%
1.40%
1.38%

14
11
59
84
267

0.7
2.2
2.0
6.0
10 9
10.9
30.3
7.8
2.2
1.4
0.1
41.7
35.6
2.0
37 6
37.6
37.6

2.01%
1.92%
2.28%
2.97%
2 57%
2.57%
1.81%
2.42%
4.81%
3.31%
3.56%
2.14%
1.43%
0.32%
0 29%
0.29%
(1.66)%

14
43
45
178
280
547
189
104
48
4
892
(508)
(6)
(109)
(623)

269
0.64%
223
46
27.9%
33
25

HighfieldshasbuiltabottomupanalysisofDeltaLloydsinvestment
portfoliobasedonthecompanysvariousdisclosures(8)

ThereareinconsistenciesinDeltaLloydsreporting,sosimplifying
assumptionshavebeenmade
p

WehaveusedDeltaLloydsdisclosureandmodeledourinvestment
portfoliodurationslightlylongerthanthedurationofDeltaLloyds
liabilities(~13years)(9)(10)

TheportfoliousesmarketyieldsperBloombergasof12/31/15
ThecorporatebondportfoliousestheBAMLEuropeanCorporate
Bond(57Yduration)index(swappedtoextendduration)to
mirrorDeltaLloydscorporatebondportfoliobyrating

Highfieldshaserredonthesideofconservatismbyroundingourestimate
downtoinexcessof~25mm ofincrementalcapitalgenerationversus
managementsguidance

(1)
(2)
((3))
(4)

See slides 5859 of Delta Lloyd FY2015 presentation for sovereign/subsovereign split.
Other subsovereigns based upon weighted average yields of EIB and EC bonds.
Corporate bond split based upon fixed income breakdown by ratings on slide 59 of Delta Lloyd FY2015 presentation.
p
p
p
y
g
y
p
Yields on mortgages, equities, property, and hedge funds are Delta Lloyd guidance . See slide 29 of FY2015
presentation.
(5) Required interest life based upon 13Y point on the EIOPA curve (including volatility adjustment) as of 12/31/15.
Balance taken from slide 29 of FY2015 presentation, adjusted for general insurance liabilities.
(6) Required interest income and protection based upon 4Y point on EIOPA curve (including volatility adjustment) as of
12/31/15. Balance taken from 2015 Annual Report, p. 112.
(7) Amortization of UFR benefit uses Delta Lloyd disclosures on slide 29 of FY2015 presentation: 29 bps (pretax) on
37.6bn of liabilities.
(8) See slides 29, 47, 58, and 59 of the FY2015 presentation.
(9) Delta Lloyd presentation: Sailing Through Difficult Times, slide 12, March 18, 2014.
(10) Delta Lloyds asset duration is actually slightly greater than its liability duration, as shown by the sensitivities on slide
67 of FY2015 presentation.

25

APPENDIXC

Delta Lloyds Operating Subsidiaries Are Also WellCapitalized and


At Comparable Levels to Peers

DeltaLloyd
Delta
Lloydssmainlifeinsurancesubsidiaryhasaproforma
main life insurance subsidiary has a pro forma
SolvencyIIratioof160%(StandardFormula)(1)

NNLifehadaSolvencyIIratioof176%(StandardFormula)
(2)
priortoitsadoptionofthePartialInternalModel
p
p

AEGONsDutchsubsidiariesarecapitalizedtoa~150%
SolvencyIIratio(PartialInternalModel)(3)

AEGONfurtherdefinesitstargetrangefor
AEGON
further defines its target range for
subsidiariesas130150%underitsPartialInternal
ModelandexpectsitsDutchsubsidiariestoprovide
significantremittancestoitsholdingcompany(4)

(1)
(2)
(3)
(4)

Oursegmentsareadequately
capitalizedforcommercial
purposesandratingagency
requirements
AnnemarieMijer
Delta Lloyd Chief Risk Officer
DeltaLloydChiefRiskOfficer
(November30,2015)

Delta Lloyd presentation: FY 2015 results and capital plan update. Slide 21. February 24, 2016.
NN Capital Markets Day presentation: Finance and capital update. Slide 13. November 19, 2015.
AEGON Strategy Update presentation: Returning capital to shareholders. Slide 7. January 13, 2016.
AEGON Strategy Update presentation: The Netherlands. Slide 18. January 13, 2016.

26

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