Aegon - Earnings Call - H1 2021

Transcript

Speaker 0

Good day, and welcome to the Aegon Second Quarter twenty twenty one Results Conference Call for Analysts and Investors. Today's conference is being recorded. At this time, I would like to turn the conference over to Jan Willem Wendema, Head of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, sir. Good morning, everyone, and thank you for joining this conference call on Aegon's second quarter twenty twenty one results. We would appreciate it if you could take a moment to review our disclaimer on forward looking statements, which you can find at the back of the presentation. With me today are Aegon's CEO, Lart Vise Chief Transformation Officer, Duncan Russell and CFO, Matt Ryder. Let me now hand over to Lart.

Speaker 2

Thanks, Jean Willem, and good morning, everyone. We appreciate that you are joining us on today's call and look forward to updating you on our second quarter results. In my part of the presentation, I will take you through the strategic highlights and through the progress we have made on our strategic assets. Our Chief Transformation Officer, Duncan Russell will take you through the actions we are taking on our U. S.

Variable annuity business. And Matt Ryder will then go through the details of the results and our capital position. Finally, I will conclude the presentation with a wrap up after which we will open the call for a Q and A session. So let's move to Slide number two. We have made steady progress on our strategic priorities and financial targets, and I'm encouraged to see this reflected in our second quarter results.

Economic recovery aided by increased vaccination rates supported our results. 2021 saw an increase in the operating result across all segments driven by expense savings, increased fees due to higher equity markets and normalization of claims experience in The United States. We have made good progress on the implementation of our expense savings program and have seen a €220,000,000 reduction in annual addressable expenses through the second quarter. This strengthens our confidence in our ability to deliver on the three year target of €400,000,000 expense savings. Our balance sheet remains strong with the capital ratios of all three main units firmly above their respective operating levels.

We have made steady progress in managing our financial assets during the second quarter. We launched a program that offers certain variable annuity customers a lump sum payment in return for surrendering their policies. Furthermore, we plan to dynamically hedge the remaining legacy variable annuity portfolio for equity and interest rate risks. These two initiatives will create value by releasing capital at terms we believe are favorable compared to other alternatives and increases the predictability of the capital that the business generates. By introducing new innovative products, expanding distribution and enhancing customer service, we are driving growth in our strategic asset category.

We achieved double digit sales growth in U. S. Life, delivered another quarter of strong sales in U. S. Middle market retirement plans and almost doubled the net deposits in our UK workplace business.

We continued our strong growth momentum in The Netherlands with record high levels of both mortgages under administration and assets under administration in new style defined contribution pensions. Asset Management also continued its growth track record of positive third party net deposits as strong demand for our solutions both in our wholly owned business and in our Chinese joint venture continues. In our ESG portfolio, Aegon Asset Management and its partners have helped to fund investments in affordable and workforce housing units in The United States to better serve our local communities. We also continue to improve our risk profile having already executed around two thirds of our planned management actions to reduce interest rate risk in The United States. The progress we are making on our strategic priorities and financial targets provides us with the confidence to accelerate the increase in dividends on our path to pay around €0.25 per common share by 2023.

Therefore, we are announcing today an increase of our interim dividend by €02 to €08 per common share. Furthermore, the strength of our balance sheet allows us to take another step towards achieving our deleveraging target. We are therefore announcing the redemption of $250,000,000 perpetual capital securities in the third quarter. Let me now give you an overview of where we stand with the execution of our operating plan on Slide number three. Our ambitious plan comprises more than 1,100 detailed initiatives designed to improve our operating performance by reducing cost, expanding margins and growing profitably.

We have continued the rapid pace and execution rhythm throughout the second quarter. We've been successful in doing that as we have completed another 110 initiatives in the second quarter bringing the total to over 500. This means that 45% of all initiatives have now been fully implemented and they will contribute to the operating result over time. Expense savings initiatives have already delivered €220,000,000 of savings which is more than half of our €400,000,000 expense reduction target. That strengthens our confidence in our ability to deliver on the target for 2023.

Initiatives aimed at improving customer service, enhancing Europe's experience and launching new innovative products are also well underway. These growth initiatives contributed €26,000,000 to the operating result in the 2021. We intend to continue the rapid pace and intense organizational rhythm throughout the remainder of the year and beyond. Let's turn to Slide four to discuss the progress we have made with respect to our strategic assets. Our priority here is to grow the customer base and expand our margins.

In U. S. Individual Solutions, we have the ambition to regain a top five position in selected life products over the coming years. In the second quarter, improving commercial momentum resulted in a 24% increase in new life sales. World Financial Group increased the number of licensed agents by 13% compared with the second quarter of last year.

We also expanded our market share in this distribution channel through the addition of a new funeral planning benefit. Furthermore, whole life final expense sales increased by 39% following enhancements made to both the product and the application process. Volume growth, more favorable product mix and lower expenses resulted in a 40% increase in the value of new business. In The U. Retirement business, Transamerica aims to compete as a top five player in the new middle market sales.

This business continued to build momentum with the fourth consecutive quarter of written sales of over US1 billion dollars and the second consecutive quarter of positive net deposits. Written sales were supported by pooled plan arrangement contract wins, which are a strategic growth driver. Sales from these types of arrangements more than doubled and now represent more than one third of this quarter's middle market sales. So let's turn to the Dutch strategic assets on Slide five. We are market leader in both mortgage origination and new style defined contribution pensions and we continued our momentum in the second quarter.

We originated EUR2.9 billion mortgages in the second quarter benefiting from a strong housing market. Mortgages under administration reached a record high of EUR58 billion. In our workplace business, we saw a 20% increase in net deposits for new style defined contribution products. Assets under management for this business surpassing the €5,000,000,000 mark for the first time and is scoring Aegon's leading position in this market. We want to develop the online bank KNUP into a digital gateway for individual retirement solutions.

KNUP continued its growth trajectory and added more than 5,000 customers in this quarter. In The United Kingdom, assets under administration reached GBP 200,000,000,000 for the first time driven by net deposits and favorable market movements. Our aim is to grow in the retail and workplace channels of our platform business. In these channels, we doubled the net deposits to £1,000,000,000 which included a significant Master Trust contract win. This underscores that we are well positioned in this fast growing market of multi employer pension schemes.

Market movements and expense savings have helped to further improve the efficiency of the platform. By growing the platform business and taking out expenses, we aim to mitigate the impact from the gradual runoff of the traditional portfolio, which is the driver behind the annualized revenues lost from net deposits for the quarter. So let me turn to our global asset manager and our growth markets on Slide number six. In our Asset Management business, we aim to significantly increase the operating margin of the Global Platforms business by improving efficiency and driving growth. Third party net deposits on the Global Platforms were 2,100,000,000 driven by significant net deposits in various investment strategies in the fixed income platform.

The operating margin of the Global Platforms business increased by nearly two percentage points. This resulted from higher revenues from net deposits, favorable market developments and higher origination fees in AGOV's real assets business. These origination fees were driven by responsible investing mandates in workforce and affordable housing. Net deposits and strategic partnerships were €815,000,000 for the quarter, driven by our joint venture in China. Increased performance fees and management fees from growth of the business led to a significant increase in the operating result for strategic partnerships to €56,000,000 In Aegon's growth markets we continue to invest in profitable growth.

The value of new business from new life sales increased by 6% mainly driven by higher sales in Brazil, Spain and Portugal. New premium production for property and casualty and accident and health insurance increased to €28,000,000 as a result of new product launched in Spain and Portugal. Here sales through our Spanish bank insurance partners are benefiting from the redesign of the digital sales channels to accelerate the digital transformation and insurance distribution. These actions supported the doubling of sales through the digital channels to over 15% of the total production in June. In summary, on Slide number seven, we are making steady progress in growing our strategic assets.

We will continue to drive efficiencies while at the same time investing in products and services to our customers in the various core businesses. And with this, I would like to hand it over to Duncan, who will talk about the actions we've taken regarding our U. S. Preval Annuity business. So Duncan over to you.

Thank you, Lars.

Speaker 3

At our Capital Markets Day, we laid out our intention to maximize the value from our financial assets by accelerating, increasing or derisking the cash flow of these blocks of businesses. To date, we have focused our resources on identifying and implementing unilateral action steps that we can take ourselves and bilateral action, steps that we can take in conjunction with other stakeholders. I would now like to highlight two recent actions that we have taken on the variable annuity business, which in total has US85 billion dollars of account value. These actions demonstrate our approach to managing our financial assets. The two actions we are announcing today are aimed at reducing our risk exposure to the legacy block of business with income and death benefit riders.

The first action is targeted at the GMIB block of business. This is a mature block of business with an account value of US6.5 billion dollars and mainly consists of policies sold by Transamerica from the 1990s until 02/2003. The associated guarantees were not originally priced nor subsequently managed on a risk neutral basis. And therefore, despite being less than 10% of our variable annuity assets, the GMIB riders alone consume about 40% of the required capital for the variable annuity book. In mid July, we launched a buyout program for the GMIB customer base, whereby we offer customers a lump sum payment in return to surrendering their policies.

This may be an attractive choice to some customers given that their needs may have changed since they originally purchased their policies about twenty years ago. On our side, we compare the cost and benefits of this program with our alternatives, including running the block off over time or transacting with a third party. And we see the buyout program as an attractive way to reduce our financial market risks and create value by releasing capital at a reasonable price as we buy out the policies below the economic value of the liability. This initiative is aimed at reducing our GMIB exposure. Achieving a 15% take up rate once it is fully completed would be a good outcome.

There is uncertainty around that and we will not have a better sense of the actual take up rate until the fourth quarter of this year. As we get more insights, we'll update you on the program's progress. Second, we have decided to expand our dynamic hedge program to cover the GMIB DB block of business, meaning that going forward all of our variable annuity liabilities will be dynamically hedged for equity and interest rate risk. Expanded hedge will build on a dynamic hedging program we have already in place for the GMWB book. That program has been running since the mid-2000s with a good track record and achieving hedge effectiveness for the targeted risks of above 95%.

We will implement the expansion as of the fourth quarter when we have more clarity on the outcome of the buyout program as that will drive the amount of hedging we will need to do. During the third quarter, we are adjusting the existing macro hedges to smoothen the transition to full dynamic hedging. The negative financial impact of these two actions, expanding the dynamic hedge and the lump sum buyout program is expected to be less than five percentage points on the RBC ratio. That assumes that markets stay around the current levels and that we do not see extreme market movement for implementation. The impact on the RBC ratio consists of a higher level of statutory reserves as we will include the hedge costs now in our reserves, but a lower level of required capital as our risk has reduced.

The lower level of required capital means that the operating capital generation from the VA block will also be slightly lower than otherwise as less capital will be released over time as the block runs off and because we no longer have an open equity exposure associated with the GMTB rider. We'd expect annual operating capital generation to be around US50 million dollars lower than otherwise would have been the case. Looking forward, we'll be left with a large mature block of variable annuity business that is hedged and consumes a relatively low level of required capital. We will continue to explore ways to improve the net present value of the business. On an IFRS basis, these actions are expected to result in a one time pre tax other charge of approximately US500 to US700 million dollars in the 2021, mostly driven by a non cash write off of deferred acquisition costs.

On Slide 10, I want to touch upon what we mean by dynamic hedging. Put simply, the interest rate and equity risk embedded in the guarantees will be immunized on an economic basis. Therefore, the financial position of Aegon will not over time be subject to changes in the value of the legacy guarantees that we have provided to policyholders on this product. One implication is our statutory reserves would effectively move to a fair value basis and move away from the regulatory prescribed grading to a 3% long term interest rate assumption. By dynamically hedging the interest rate risk embedded in the guarantees, we will mitigate the interest rate sensitivity of the reserves.

Aligning our capital position and economic view of the liabilities simplifies our management and decision making around this block of business going forward. I also want to be clear on the two exposures that will remain for our shareholders and why we have decided not to hedge these. First, while we hedge the equity risk embedded in the guarantees, we've chosen not to hedge changes in the present value of the fee income from the base mutual fund contract. We see these as an asset management type exposure on which we will earn a return over time. This base fee sensitivity is the main driver of our residual equity market sensitivity in The U.

S. Of 34 percentage points on the RBC ratio for a 25% drop in equity market. Second, we will remain exposed to risks from changes in realized and implied volatility. We considered hedging this, but concluded that the cost of doing so was onerous relative to the benefits that we bring to our shareholders. The level of implied volatility is an input into the valuation of our variable annuity guarantees.

Implied volatility tends to be higher than actual realized volatility, which makes it expensive to hedge and spikes in implied volatility tend to mean revert. Exposure to realized volatility is caused by the complexity of our liabilities and our delta hedge program, given the nature of the guarantees to our customers. It's costly to fully hedge the impact of realized volatility with complex instruments like options or variance swaps. Therefore, have decided to only partially hedge this risk to protect ourselves against the tail risk of extreme market movements. We will explore ways to further reduce our sensitivity to movements in equity implied volatility.

In the meantime, this means that periods of higher implied volatility all else being equal will lead to a lower RBC ratio and vice versa. Let me wrap up my part of the presentation on Slide 11. Our aim with the finance assets is to proactively manage our risks, exposures and profitability in order to improve the net present value of these businesses. We have allocated resources to the finance assets in order to drive this and feel that we are making good progress. The actions that I have described today are significant examples of the measures we are taking.

The buyout program for the GMIB block will reduce our exposures and risks on terms we believe are favorable compared to the alternatives. The remaining exposure will be more tightly managed on a risk neutral basis, just to ensure that shareholder outcomes are more predictable. We will continue to seek additional ways to create value from our financial assets. This can include additional unilateral or bilateral actions as those are more in our control and we can more easily quantify and understand the financial impact of those. But we will now allocate internal resources to investigate our options around potential third party solution.

We aim to be transparent in our considerations on this topic and how we intend to maximize value of the variable annuity business. So will provide an update on our progress sometime in the 2022. With that, I'd like to hand over to Matt.

Speaker 4

Thanks, Duncan, and good morning, everyone. On the next several pages, I will take you through the highlights of our second quarter twenty twenty one results and our capital position. Let me start with the financials on Slide 13. Expense savings, increased fees from higher equity markets and a normalization of claims experience in The U. S.

Drove the increase of our operating result by 62% from the year ago quarter to €562,000,000 Our balance sheet remains strong with the capital positions of all our three main units firmly above their respective operating levels and the Group Solvency II ratio at 208%. Cash capital at the holding is in the upper half of the operating range at €1,400,000,000 This allows us the flexibility to continue to execute on our transformation as well as to further reduce our gross financial leverage, which stood at €6,100,000,000 at the end of the second quarter. One of our priorities is the reduction of economic interest rate exposure in our U. S. Business.

Next to the actions discussed by Duncan, we have executed on about two thirds of our interest rate reduction plan. This primarily involved lengthening the duration of our asset portfolio and extending our forward starting swap program. Another priority is proactively managing our long term care portfolio. In the second quarter, we obtained approval for additional rate increases worth $64,000,000 This brings the total to $176,000,000 and means that we have already achieved over 50% of our $300,000,000 target. Let me turn to Slide 14 to go into more detail on the expense savings.

At our Capital Markets Day, we announced our plan to reduce addressable expenses by €400,000,000 In the last four quarters, we reduced addressable expenses by €245,000,000 compared with 2019. Euros $220,000,000 of these savings are driven by the expense initiatives as part of our operational improvement plan. We are continuing to execute on this plan and are satisfied to have already delivered half of the expense reduction target. Expenses in this quarter again benefited from lower travel and marketing activities due to the impact of the COVID-nineteen pandemic. We expect these benefits to reverse over time.

Furthermore, we aim to profitably grow our business by improving customer service, enhancing user experience and launching innovative new products. While these growth initiatives resulted in €28,000,000 of expenses in the last four quarters, they contributed €26,000,000 to the operating result in the 2021. Let me turn to Slide 15 to share with you the most important drivers behind the increase in our operating results. In the 2021, our operating result amounted to €562,000,000 an increase of 62% compared to the same period last year. In fact, the apples to apples increase is 74 at constant currencies and when adjusting for the reclassification of the operating result of Central And Eastern Europe to other income.

The operating result not only benefited from lower expenses, but also from higher equity markets. We saw significant revenue growth mainly in asset management and our fee based businesses in The U. S. Improved investment margins in The Netherlands supported by increased allocation of corporate bonds also contributed to higher earnings. In U.

S. Life business, mortality claims experience was €27,000,000 adverse relative to our long term expectations, which is a significant improvement compared with the second quarter of last year. The adverse mortality experience was largely attributable to COVID-nineteen as the cause of death. This was offset by €55,000,000 favorable morbidity claims experienced in the long term care book, which included a one time reserve release. Correcting for this one time reserve release, actual to expected claims ratio was eighty one percent, driven by elevated claims terminations as a result of higher mortality.

In The UK, the operating result increased by nineteen percent to €44,000,000 driven by lower expenses and higher fee revenues from growth of the platform business. The operating result from international increased by €1,000,000 to €34,000,000 However, on an apples to apples basis and at constant currencies, the operating result increased by 60%, reflecting significantly better results in TLB and Spain and Portugal. Finally, the operating result from asset management nearly doubled to €71,000,000 mostly driven by our Chinese asset management joint venture. The operating result of the global platforms increased as well because of higher revenues from net deposits and favorable market movements. Let us turn from operating result to net results on the next slide.

As you can see on Slide 16, the net result amounted to €845,000,000 for the 2021. Non operating items contributed a gain of €644,000,000 before tax. Fair value gains amounted to €468,000,000 and were largely driven by private equity and real estate revaluations in The Americas and The Netherlands. In addition, the macro hedge program in The Americas delivered a gain as a result of the macro interest rate hedge paying off as interest rates declined. We realized gains on investments of €162,000,000 mainly due to gains on debt securities in The U.

S, which were sold to fund investments in long duration assets as part of the interest rate risk management plan. Once again, we benefited from a benign credit environment with net recoveries of €15,000,000 Other charges amounted to €153,000,000 and mainly resulted from more conservative assumptions for variable annuity surrender rates to reflect portfolio and industry experience. One time investments related to the operational improvement plan along with the charge related to settlements of litigation in The Americas were almost fully offset by the release of a provision in The Netherlands following a settlement related to a coinsurance contract. I'm now turning to Slide 17 to go through the capital positions of our main units. The capital ratios of our three main units ended the quarter above their respective operating levels.

The U. S. RBC ratio increased by 16% during quarter to 444%. The RBC ratio was positively impacted by higher equity markets and by positive private equity and real estate revaluations. The RBC ratio benefited from management actions including the sale of an alternative asset portfolio.

In The Netherlands, the Solvency II ratio of the Dutch Life unit increased by 23 percentage points to 172%. This increase reflects benefits from management actions, model updates and favorable market movements. The main management action in The Netherlands was a settlement related to a coinsurance contract. This led to a release of a technical provision and a reduction in required capital. Model updates related to refinements of asset and expense modeling, real estate revaluations and favorable interest rate movements also contributed to the increase of the ratio.

Operating capital generation had a positive impact and more than offset the €25,000,000 remittance to the group in the second quarter. Scottish Equitable, our main legal entity in The UK, increased its solvency ratio to 163%. This increase was primarily driven by a forthcoming increase in the corporate income tax rate, which led to a reduction in required capital. Let us now turn to the development of cash capital at the holding on the next slide. Cash capital at the holding increased during the quarter driven by remittances from our units.

Some units paid their half yearly remittance during the second quarter, including The U. S. In addition, we received the regular quarterly remittance from the Dutch Life unit. After deducting funding and operating expenses of the holding, this results in free cash flows of €175,000,000 for the quarter. Proceeds from the divestment of Transamerica's portfolio of FinTech and InsurTech companies were partly offset by minor capital injections into some country units.

Cash capital at the holding closed the quarter at €1,400,000,000 which is in the upper half of the operating range and provides the group sufficient financial flexibility to both execute on the transformation program and to continue efforts to reduce financial leverage. Furthermore, we expect to inject capital into one of our growth markets, Brazil. We will contribute approximately €40,000,000 to enable the business to absorb adverse claims experience from COVID-nineteen, while maintaining a strong balance sheet to support its current growth trajectory. This brings me to my final slide regarding our delivery on capital deployment commitments. At our Capital Markets Day, we guided for muted near term dividend growth.

Since then, we have made steady progress on our strategic priorities and financial targets. This supports an increase of the interim dividend by $02 compared with last year to $08 per share. Finally, we continue to reduce the gross financial leverage as we have announced today our intention to redeem US250 million dollars in perpetual capital securities. After the redemption, we will have reduced our gross financial leverage by approximately €700,000,000 since the 2020 to €5,900,000,000 This puts us on track to achieve our target to reduce gross financial leverage to between 5,000,000,000 and €5,500,000,000 by 2023. With that, I pass it back to you, Lars, for the wrap up.

Speaker 2

Thanks, Matt, and thank you also Duncan. I would like you all to take away from today's presentation that we are making steady progress on our strategic priorities and our financial targets. We have increased our operating results supported by all segments. We are implementing our operational improvement plan initiative by initiative and are maintaining an intense organizational rhythm. We have achieved more than half of our €400,000,000 expense savings target for 2023.

We are increasing the value of our variable annuities portfolio through a lump sum buyout program and by extending the dynamic hedging program. This also allows us to allocate internal resources to investigate our options around potential third party solutions. And we are maintaining our commercial momentum in our strategic assets. Lastly, we continue to work together with the Vienna Insurance Group to close the divestment of our businesses in Central And Eastern Europe. BIG is in constructive talks with the Hungarian state and has indicated that they are confident that the matter will be resolved in the near term.

In summary, I am pleased with the results we announced today and how we are progressing steadily on our strategic commitments and financial targets. I would now like to open the call for your questions. And in the interest of time, I kindly request you to limit yourself to two questions. Operator, please open for the Q and A.

Speaker 0

Thank you, sir. Our first question comes from the line of Andrew Baker from Citi. Please go ahead.

Speaker 5

Hi, everyone, and thanks for taking my questions. So the first on The U. S. Risk management actions. Wondering if you could give us a sense of the capital that you expect to be released from the expansion of the Dynamic VA hedge and also the lump sum buyout program?

And then secondly, on just your target. So obviously, it looks like you're on track to well exceed the guidance that you had on OCG for both 2021 and potentially 2023, as well as maybe free cash flow. So I was just wondering if you could just give an update on what your expectations on those metrics are? Thank you.

Speaker 2

Thank you very much Andrew for your questions. The first one will be taken by Duncan, the second one by Matt. So on U. S. Risk management actions, Duncan?

Speaker 3

Thank you, Andrew. As indicated, we think the net impact of the two will be a no worse than a five percentage point hit to the RBC ratio. And within that, we'd expect a small positive from the buyout program and a small negative from the implementation of the dynamic hedge. The capital back in the VA block, the statutory capital back in the VA block today is around US2 billion dollars And once we implement the dynamic hedge, think that will drop to around about $1,400,000,000

Speaker 2

Okay. Matt, the

Speaker 4

Yes. Second On operating capital generation and let's say the remittance outlook. So just a reminder, at the Capital Markets Day, we had guided for €1,100,000,000 of operating cash gen from the business units. And in first quarter call, I guided more to the 1,400,000,000.0 Given the progress that we have made on the operational improvement plan and other tailwinds that we've received through the second quarter, including the COVID mortality experience has been more benign, especially on the morbidity side, we're guiding now to something between 1,400,000,000.0 and €1,500,000,000 for operating capital generation. Now in terms of the remittance guidance, we had been guiding toward something like 1,400,000,000.0 to $1,600,000,000 cumulatively through 2023 at the Capital Markets Day.

At this moment in time, we're not changing the guidance on remittances, but more saying that it looks like it more is in the top end of that range more than the bottom of the middle. So I think that's it.

Speaker 5

Thank you.

Speaker 0

Thank you. We will now move to our next question from David Barman from Pareva. Please go ahead.

Speaker 6

Good morning, and thank you for taking my questions. The first one is to come back on the measures on the VA block. So you I think the day one impacts are quite clear, but you also mentioned the objective around the predictability of the business line. And obviously, it's quite difficult to look at the capital generation development of the variable annuity block. Can you talk a little bit about how we should think about the volatility of the metrics in that block post the actions that you've announced today?

And then the second question is on the Dutch solvency ratio. Could you just help us break down the moving parts in the second quarter? Thank you.

Speaker 2

Thanks, David. So on the VA question, Duncan, and then the Dutch ratio, Matt. So Duncan, please over to you.

Speaker 3

Sure. You're right, David, that one of the drivers one of our philosophies has been to reduce the volatility around our capital base and capital generation and for the financial assets that's an important consideration. If you look at the variable annuity kind of block of business post the implementation of the dynamic hedge, capital generation will be lower. We've guided for operating capital generation to be around US50 million dollars lower and to be in the range of $250,000,000 to $300,000,000 going forward once that's implemented. That capital generation there will be a higher quality because we will have immunized the risks around the guarantees in the block of business.

And we'll be left with volatility coming from the base contracts, which we think is more like an asset management type of fee income because that's the fee we earn on the underlying mutual funds. And then about half of the capital generation will be coming from that source. And the rest of the capital generation will be coming from the release of required capital spread and on reserves, etcetera, which also we think is a higher quality source of capital generation. Hopefully that answers your question.

Speaker 4

So Matt, please? Yeah, for the Dutch solvency ratio, I can I think I can bridge you pretty easily? So we started out the quarter at 149% solvency ratio. We had some operating capital generation there, so you kind of add 2% to that. And then we had some market variances mostly related to interest rate movements.

So interest rates declined, but also the yield curve flattened. And then in real estate revaluations, which I think I mentioned in the opening, those added about two percentage points to the solvency ratio. So between those two things, markets added about six percentage points. And then there were some management actions that took place. You may recall from my opening remarks, we did settle a litigation basically that arose from a coinsurance contract in The Netherlands.

That added five percentage points to the ratio. And there were some changes to the fixed income portfolio, which added two percentage points basically it was a reduction in structured credit exposure. And then there were 10 percentage points worth of various model and assumption updates. I'm not gonna get into the detail of that, but I think that should get you to around the $1.72 that we ended the quarter at.

Speaker 0

Thank you very much. We'll now take our next question from Ashish Musadde from JPMorgan. Please go ahead. Ashish, please go ahead. Your line is open.

Speaker 7

Sorry, I was muted. Sorry. So good morning, Duncan, Lard and Mark. Just a couple of questions I have is, I mean, how do we think when the two actions you are taking, ultimately, it is negative for RBC ratio, it is negative for operating capital generation, it is negative for financial numbers like IFRS numbers. So it's like negative from all those numbers perspective.

I understand it reduces the risk, so that's a good thing. I mean, least it will help your cost of equity. But does it help you to exit that business as well at some point? The moment you have, you have, like, done all the hard work, heavy lifting of hedging, etcetera, then does it become very easy for you to exit that financial asset or it doesn't change anything from that perspective? So any thoughts on that would be very interesting.

And would you be interested in exiting once you have done all those heavy lifting? Or would you want, okay, I've done all this heavy lifting, why now sell it rather than just run it for cash? So that's the first one. And second thing is, Matt, this thing about capital generation, you mentioned 1,400,000,000.0 to $1,500,000,000 is what you're thinking about at the moment. I mean, clearly, rates have dropped from when we discussed about 1,400,000,000.0 in first quarter.

So clearly, if you're trying to still say that 1,400,000,000.0 has actually gone up, I'm a bit surprised and it would be good to know what are the drivers of those jump given that interest rates have dropped in second quarter. So that would be very helpful. And like is it a good run rate going forward? Or is it just for including one off, etcetera, something like that? Thank you.

Speaker 2

Yes. Thanks, Rasik. So Duncan, on the VA please and then Matt will indeed take the capital generation question.

Speaker 3

Morning, Ashik. I'll try and break down my answer a bit. So firstly, I think the two initiatives we've announced today are meaningful and do create meaningful value for our shareholders. And part of the reason we focused on them was because in a relatively short period of time, we've been able to identify ways to create value and also execute upon it. And that was part of the consideration of the focus at this point in time on bilateral and unilateral actions.

As you point out, there's a small negative impact on the RBC, no more than five percentage points negative and a small reduction in operating capital generation going forward as there's less capital to be released going forward. But they're outweighed in our view by the benefits to predictability, certainty and just general risk management. And also the fact that we've now aligned our statutory reserves and statutory capital to a risk neutral or economic view of the liability just makes our decision making going forward easier as our economic view is aligned with our capital view. I think you're right to say that the two actions are helpful as we move now into exploring third party transactions. As we've got now, as I said, the statutory capital base moves on to a more economic base, and we think third parties will look at it on that way also.

And we are at the same time reducing the size of the GMIB block of business through the buyout program and basically acquiring liabilities back slightly below the economic value. So we are going to move into the phase now of exploring the implications of third party possibilities to us. And we will be rational in approach there, as one of our themes indeed is to improve the predictability and quality of our cash flow and risk management. However, there are other considerations we'll have to weigh up. For example, there could be capital implications, capital dis synergies from taking out the VA block that could be counterparty exposures we need to understand and mitigate because it is a large exposure at the end of the day.

The structure, the VA block is in a legal entity, a single legal entity and how exactly we extract that is something we'd have to work through. We'd obviously have a view on value and which would be rational around that. And then finally, as I pointed out to earlier question, it is an overall it is the VA block is still a meaningful contributor to the overall group financial setup. It's going to contribute still on a operating capital generation basis, roughly US250 to US300 million dollars per annum and consumes roughly $1,400,000,000 of capital post implementation of the hedge. So we have to wait for those things and that's part of the work we're going to do in the coming months and quarters.

And we'll look to come back to you some point in first half twenty twenty two on our considerations around that.

Speaker 7

That's okay. Thank you, Andrew.

Speaker 4

Yes. So I can pick up the operating capital generation. So yes, guiding toward 1,400,000,000.0 to €1,500,000,000 for the full year. One thing I would mention is that we have seen interest rates come down a little bit from the first quarter. So they were down about 30 basis points as of the second quarter and as of today maybe another 10 basis points.

But just good to remind everybody that we're not so sensitive to interest rate movements on operating capital generation in The U. S. Especially. Where we are sensitive is on equity markets and those things have continued to perform strongly and that is driving some of the, let's say, expected increase in the operating cap gen for the remainder of the year. Now having said that, you asked like what's a decent run rate?

So second quarter is a pretty good base from which to start. So just to kind of walk it forward, we had €376,000,000 of operating cap gens after holding and funding expenses. Sort of add that back and get to $435,000,000 And then there were some positive one offs. You know, we had the, you know, the combination of mortality and morbidity good guys in the in The U. S.

And there were a couple other tailwinds from from other items within the in Europe. Do you come down to, like, like, let's say, a clean quarter would be about €380,000,000 for the just for the clean quarter operating cap then within the business. The first half of the year, we did 07/23. Add two times the $3.80, and then you get to something in that, you know, 1.4, you know, something in that 1.4 to 1.5 space depending on what you think COVID is gonna do in the last half of the year. We factored in fifty thousand US population deaths, call it about a little less than half of, let's say, twenty million euro for for extra COVID claims.

You could pencil your own number in there. We could be in the middle of a second wave. We didn't take anything into account for, you know, positive morbidity experience. So the 1.4 to 1.5 seems to be a, like, a safe.

Speaker 7

It's very clear when very detailed. Thank you, man.

Speaker 0

Ole Leung from Morgan Stanley. Please go ahead.

Speaker 8

Hello. Thank you. Very good good set of results. I got two questions. So the first one, the VA, the the the kind of you're approaching your current existing customers to buy out the policies.

I assume that has been you need have been gained regulatory approval. And just wondering how you and because as Duncan said, you actually buy out these policies under below the the economic value of the policies. We'll have you how did you assess the kind of kind of litigation risk of in in the future? That's the first one. And then secondly is you haven't mentioned about your plan on the fixed annuity book in The US, which is that is also kind of your financial assets.

Is the are you are you kind of is the fixed annuity solution will come together with variable annuity book solution or is a separate consideration? Thanks.

Speaker 2

Yes, thanks, Owen. So

Speaker 0

Duncan, over to you. Sure.

Speaker 3

The thing to understand about the buyout program is we are offering our customers an opportunity to surrender their policies in exchange for cash value. As I pointed out, these products were sold a long time ago, in some cases twenty years ago and the circumstances of our customers could have changed over that period. So they have the ability to exchange or surrender their policy in exchange for cash payment, which is north of their account value and could be attracted to them. But it's obviously at their discretion and their choice and they'll engage with their advisors on that. We did pre engage with advisors before launching the program to get feedback.

And we've had feedback constructive feedback since launch. But it's still very early and we'll have to see how that progresses over the coming weeks and months. On our side, as you pointed out, the buyout offer is slightly lower than the economic value of the guarantees to us. And so we also think it's beneficial for our shareholders. The second question was on the fixed annuities.

Yes, and whether that will come together with the VA, it could do. We'll as I said, we've just started exploring transaction considerations and considerations in general around third party solutions for the variable annuity block. The fixed annuity block is also financial asset. It could contribute to any liquidity considerations we may have around the variable annuity block, but that's something we'll take into account as we progress over the coming months and quarters.

Speaker 0

Thank you. We'll now move to our next question from Michael Hunter from Berenberg. Please go ahead.

Speaker 9

Thank you. I related to two questions, but I think so the can you say the various measures in The U. S. And the updated guidance on operating capital generation? What does it do to The U.

S. Cash remittance, which I think was two zero nine million dollars in the first half? At what stage, when can we see a meaningful rise in this figure? What I'm trying to say is, could we see it already in the 2022 or the 2023? And the second question is on the buyout program.

So the figures you've given are based on the 15% assumption. Can you give a little bit of a sensitivity around that figure? What if it were 2020, what would be the benefit? That's my two questions. Thank you.

Speaker 2

Yes, thank you very much, Michael. Let's start with The U. S. Cash remittance question, Matt Ryder. And then followed by your question on the program by Duncan.

So Matt, over to you.

Speaker 4

Yes. What I can say there is that so just maybe the facts first. So in the second quarter, The U. S. Did remit $2.00 $9,000,000 That's their normal remittance.

They did €18,000,000 in the first quarter as well. We haven't changed our outlook for the remittances from The U. S, but I think it's important to reflect the fact that the we are increasing the dividend by $02 a share here for a reason here. So we're not getting into the detail of remittance guidance within The U. S.

But I think that $0.2 a share increase is telling you something about that. And that is driven by operating capital generation that looks to be in that $900

Speaker 3

to $950,000,000 range in The U. S. Okay. Thank you. Duncan?

Yes. On the second question, Michael, the dynamic here is that we will be paying out cash if and when policyholders opt to that option and releasing associated guaranteed reserves and required capital. And we think that that dynamic is a slight positive for the occupancy ratio as indicated. We're not giving a sensitivity of it. It's very early in that program.

And in truth, it depends on which policyholders accept their specific characteristics, specific circumstances and also how markets develop between now and the uptake of the offer. So if it's okay with you, we'll look to come back in 3Q or 4Q with them for the details.

Speaker 9

And just a follow-up, you said you've spoken to advisors and clearly the program was launched about a month ago. Can you say a little bit more about the progress?

Speaker 3

Okay. No, in short. So you're right, we did obviously we've been working on this for several months and we as you launch it, there's a lot of execution which goes around it. One part of that is making sure that we have feedback prior to the launch and we've obviously have feedback since that which has been constructed. So it's really early to be honest with you Michael, it's just some holiday very early customers have to engage with their advisors.

So we're not expecting to get more information really till a couple of months from now.

Speaker 4

Thank

Speaker 0

you. And we'll now take our last question from the queue from Parquhar Murray from Autonomous. Please go ahead.

Speaker 10

Good morning, all. Just two questions, if I may. Firstly, on capital generation and remittances, you seem to have increased the capital generation target for full year 2021 by about GBP 600,000,000.0 versus where we were in December. And on the kind of cash flows remittances side, you seem to be basically talking towards the upper end of the cumulative range, which I think adds about $300,000,000 Can you possibly just explain whether there's something to that gap between the two? Or is this kind of a bit more of a conversation at the end of the year?

And then secondly, turning to the variable annuity actions and in particular RBC and capital generation impacts, could you just clarify that those are based on June market circumstances? And might you just be able to outline the sensitivities around those impacts just so we understand how they could vary between here and closing at the

Speaker 3

end of the year? Okay.

Speaker 2

So let me thank you very much, Farquhar. So let's start with Matt on the Capgem question and then Duncan after that the VA question.

Speaker 4

Yes. So on the operating capital generation, you said, is it more of a conversation from the end of the year? We'll see how the year turns out. I would just say that so far the progress has been actually quite good both in terms of the implementing the operational improvement plan, but also the macroeconomics have been favorable for us. Those are big tailwinds.

The way that we kind of think about it is that we've kind of drastically reduced the downside risk in the overall targets that we put out at the Capital Markets Day. So all that is kind of encouraging. But to be clear, we are still early in the transformation, and we do have a lot of work to do. You you could say that we're, you know, perhaps late in the economic cycle, and we do wanna be cautious about, you know, the outlook for credit markets for example, but also COVID claims if we get into a second wave in The U. S.

As we come out of the COVID-nineteen pandemic. So we're not changing our guidance at this point in terms of remittances, Only to say that we are now guiding toward the top end of that gross remittance guidance for the twenty twenty one to twenty twenty three guidance that we've done at the Capital Markets Day. So we had that at 1,400,000,000.0 to €1,600,000,000 So now we're thinking more like 1,600,000,000.0 But clearly, the progress that we've made in the capital markets have helped us along here. We are guiding more towards the top end.

Speaker 2

Thank you very much, Matt. So Duncan?

Speaker 3

Hi, Farquhar. No, they're based on 2Q. They're based on current circumstances. And with respect to additional guidance, it's a bit tricky. And the reason for that is, there's obviously quite a few variables here in terms of the take away from the buyout program, which will in itself may be influenced by equity markets and interest rates.

And then also the implementation of dynamic hedge, which also impact of that could be influenced by equity markets and industry, plus the fact that we put in a partial hedge several months ago as well, which is on rates, which is quite some mitigation. However, we feel fairly confident that the as I indicated in my presentation that the net of that is going to be no worse than five percentage points in the RBC ratio barring really extreme market movements. So we feel pretty comfortable with that guidance.

Speaker 10

Just as a follow on, does that kind of extreme circumstances carry through to the capital generation indication as well?

Speaker 3

The capital generation, the US50 million dollars adjustment to the capital generation is mostly driven by was driven by two things. One is just a lower level of required capital being released because we're effectively transferring capital into reserves here. And so that may get slightly impacted by rates and equity markets on implementation because that will impact how much required capital is being impacted. But as I said, the five percentage points that should be fairly range bound. And the second impact is the impact of the dynamic of the hedge on the equity market from the DB book of business, where the operating capital generation we assume an 8% equity market return and we will no longer capture that.

And so I don't think it's meaningfully impacted by market circumstance.

Speaker 10

Okay, perfect. Thanks so much.

Speaker 0

Thank you. At this, I would like to hand the call back over to Lars Priest, Chief Executive Officer, for any additional or closing remarks.

Speaker 1

Thank you, operator. This is Navalan Weidema. This concludes today's call. Thanks again for your continued interest in Aegon.