Aegon - Earnings Call - Q3 2021 TU

Transcript

Speaker 0

Good day, and welcome to the Aegon Third 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 Daidena, Head of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining this conference call on Aegon's third quarter twenty twenty one results. You 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, Lark Frieser and CFO, Matt Ryder, who will take you through the key points for this quarter. Let me now hand over to Lark.

Speaker 2

Thank you, Jan Willem, and good morning, everyone. We appreciate that you are joining us on today's call and we look forward to updating you on our third 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. Matt Ryder will then go through the details of the results and our capital position. He will also summarize the actions we have taken to further strengthen our balance sheet and to manage the financial assets.

Finally, will conclude the presentation with a wrap up after which we will open the call for question and answers. So let's move to slide number two. In the 2021, we continued to drive our transformation forward by delivering on our financial and strategic commitments. And I am encouraged to see this reflected in our results. These results are supported by the benefit from expense savings initiatives and we remain on track to deliver on the three year target of $400,000,000 expense savings.

In our strategic assets and growth markets, we are benefiting from the growth initiatives that we have implemented and our asset managed business extended its track record of over nine years of positive third party net deposits. We saw an improvement in performance across most of our businesses. This was offset by adverse claims experience in The U. S. With COVID-nineteen and a higher average claim size being the most important drivers.

As a consequence, the operating result decreased by sixteen percent. We expect the impact from COVID-nineteen to abate over time. In addition, we want to reduce the volatility and mortality experience in The U. S. And are looking at management actions to mitigate this.

In the third quarter, we remain proactive in managing our financial assets. We launched a lump sum buyout program for certain variable annuity policyholders which was well received by customers. Moreover, the guarantees on the remaining variable annuity portfolio are now being fully hedged against equity and interest rate risk. Furthermore, we have almost fully executed our planned management actions to reduce interest rate risk in The U. S.

Which has led to a significant reduction in our interest rate exposure. In our long term care business, we have already achieved approval for more than $300,000,000 worth of rate increases and consequently we have increased our expectations for the rate increase program to US450 million dollars This underscores our track record of actively managing this business. Our balance sheet remains strong and in line with our disciplined capital management framework. The capital ratios of all three main units are above their respective operating levels and our Group Solvency II ratio increased to 209%. We've also strengthened approach towards corporate sustainability.

Last week, we announced Aegon's group wide commitment to transitioning our general account investment portfolio to net zero greenhouse gas emissions by 2050 with an intermediate goal set for 2025. This further underpins our concrete action plans to create lasting value for all our stakeholders. 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 continuing its constructive dialogue with the Hungarian Ministry of Finance to clarify possibilities for a positive conclusion of the acquisition. 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 that now comprises more than 1,200 detailed initiatives is designed to improve our operating performance. We are continuously adding new initiatives to this plan to make up for any delays in existing initiatives and to capture the full potential of our organization. In the third quarter, we completed another 150 initiatives. More than six eighty initiatives have now been fully implemented and are contributing to the operating results over time. Expense savings initiatives have so far delivered EUR248 million of savings.

So we remain on track to deliver on the EUR400 million expense reduction target in 2023. Initiatives aimed at improving customer service, enhancing user experience and launching new innovative products are also well underway. These growth initiatives contributed €29,000,000 to the operating result this quarter. We intend to continue executing the expense and growth initiatives at pace. Let's now 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 The U. S. Individual Solutions business, we have the ambition to regain a top five position in selected life products over the coming years. In the third quarter new life sales improved by 13% mainly driven by Index Universal Life and whole life final expense products.

Sales are benefiting from a 24% increase in licensed agents at World Financial Group and from a funeral planning benefit for eligible index universal life policyholders. Whole life final expense sales increased following enhancements made both to the product and the application process. In The U. S. 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 fifth consecutive quarter of written sales of over $1,000,000,000 the third consecutive quarter of positive net deposits. So let's turn to our Dutch strategic assets on slide number five. We are market leaders in both mortgage origination and new style defined contribution pensions and we saw continued commercial momentum in these businesses in the third quarter. Mortgage sales amounted to EUR 2,700,000,000.0 as we benefit from our strong origination capabilities. About two thirds thereof consisted of fee based mortgages originated for third party investors through our Dutch mortgage funds.

In our workplace business we saw a 6% increase in net deposits for new style defined contribution products. Assets under management for this business increased to €5,600,000,000 at the end of the quarter underscoring Aegon's leading position in this market. As you are aware, we want to develop our online bank KNOP into a digital gateway for individual retirement solutions. In the 2021, the online bank attracted 9,000 new fee paying customers. This was offset by 11,000 customers leaving KNAP stemming from our decision to stop offering savings products to non fee paying customers as they were loss making.

Moving on to The United Kingdom. Assets under administration remained above the GBP 200,000,000,000. Gross deposits increased reflecting stronger investor sentiment as well as the benefits from ongoing investments in the business. This led to an improvement in retail net deposits. However, this was more than offset by the termination of a low margin investment only scheme in the workplace segment, which led to net outflows in this business.

Expense savings initiatives and the favorable impact from market movements on assets have led to an improvement in the efficiency of the platform. This more than offsets the revenues lost from the gradual runoff of the traditional product portfolio. Let me now turn to our global asset manager and our growth markets on slide number six. In our asset management business the operating margin of global platforms almost doubled as a result of higher revenues from net deposits and favorable market developments. Third party net deposits on the global platforms amounted to €2,400,000,000 driven by inflows on the fixed income platform.

Net deposits and strategic partnerships were €1,300,000,000 for the quarter driven by a joint venture in China. Continued net deposits together with favorable equity markets have led to a significant increase in management fees. This was offset by a normalization of performance fees compared with the exceptional levels seen in the same period last year, resulting in a decline in the operating result for strategic partnerships to EUR44 million. To drive further growth, Aegon Asset Management's wholly owned subsidiary in Shanghai has completed its onshore investment advisory registration. This allows us to provide a range of global investment solutions including those with an ESG focus to Chinese institutions and high net worth investors.

In EAGL's growth markets we continue to invest in profitable growth. Sales growth in the bank insurance channel in Spain and Brazil was however offset by lower new life sales in China caused by an industry wide lower demand for critical illness products. New premium production for property and casualty and accident and health insurance increased to €21,000,000 as a result of sales of new products in Spain and Portugal as we continue to see benefits for sales after the redesign of our digital sales channels through our Spanish bank assurance partners. I am now on Page number seven, turning to a topic that is on all our minds, sustainability and climate change. Our stakeholders in the wider world expect us to act sustainably as an insurer, asset manager and employer.

We recognize the role that Aegon plays in society with respect to responsible investing and we continue to progress with our approach to sustainability. Coinciding with the COP26 conference in Glasgow, we announced Aegon's group wide commitment to transitioning our general account to net zero greenhouse gas emissions by 02/1950. In this context Aegon has joined the Net Zero Asset Owner Alliance, United Nations convened group of institutional investors committed to transitioning their portfolios to net zero greenhouse gas emissions. To ensure progress towards this 2050 commitment, Aegon has set an intermediate target. By 2025, we aim to reduce the carbon intensity of our corporate fixed income and listed equity general account assets by 25% compared with 2019.

On our path to net zero, we will regularly update our group wide excluding criteria and increase our engagement with the most carbon intensive companies in our investment portfolio to achieve real world carbon emission reductions. Next to our group wide initiatives, our local units are taking additional actions and are working to meet the demand for ESG products from our customers. For instance, Aegon Asset Management has joined the net zero asset managers initiative and our Dutch business will commit to an extended 2050 climate action plan to include separate account assets and all balance sheet investments in addition to general account assets. Ahead of COP26, Aegon UK in partnership with Aegon Asset Management launched its innovative global sustainable sovereign bond fund. The fund invests in those countries that are making the best progress towards the United Nations sustainable development goals and allows our workplace pension customers to align their investment objectives with the goal of a fair and sustainable future.

In summary, we continue to deliver on our strategic priorities and are making steady progress in growing our strategic assets and growth markets. We will continue to drive efficiencies while at the same time investing in products and services that better serve our customers in our various core businesses. And with this, I would like to hand

Speaker 3

it over to Matt, who will talk about the results for the quarter and update you about our actions on the financial assets. Thanks, Elard, and good morning, everyone. Let me start with the financials on Slide nine. Our operating result decreased compared with the 2020 to €443,000,000 Increased fees from higher equity markets and positive contributions from growth were more than offset by adverse claims experience in The U. S, which was mainly attributable to COVID-nineteen and a higher average claim size.

Our balance sheet remains strong with the capital positions of all our three main units above their respective operating levels and the Group's Solvency II ratio at 209%. Cash capital at the holding decreased to €961,000,000 as anticipated and now sits in the middle of the operating range. The decrease reflects the payment of dividends and use of cash for additional deleveraging. Since mid-twenty twenty, our gross financial leverage has reduced by €700,000,000 and now stands at €5,900,000,000 This puts us on track to meet our target of reducing our gross financial leverage to 5,000,000,000 to €5,500,000,000 We have also made good progress on the reduction of our economic interest rate exposure in The U. S.

We have now almost fully executed the interest rate reduction plan that we announced at the Capital Markets Day by lengthening the duration of our asset portfolio and expanding the forward starting swap program. Together with the expansion of the dynamic hedging program for variable annuities and favorable market movements, this has led to a 75% reduction in the targeted interest rate risk since the 2020. Let me now turn to slide 10 to go into more detail on the expense savings. In the last four quarters, we reduced addressable expenses by €253,000,000 compared with 2019. Euros $248,000,000 of these savings are driven by expense initiatives that are part of our operational improvement plan.

This level of expense savings is comparable to what we had achieved through the second quarter. The benefit of the additional cost savings initiatives implemented this quarter was offset by higher one time employee expenses. Our progress makes us confident that we will be able to achieve our expense savings target of €400,000,000 by 2023. When we created our operational improvement plan, we took into account the nature and complexity of the underlying initiatives. Most of the initiatives that we have implemented so far were relatively straightforward and led to savings coming through with a short lead time.

Let me give you an example. We have implemented changes in our ways of working. For instance, in our risk and communications departments, we found ways for the holding and Aegon, the Netherlands to work more closely together with shared processes enabling a reduction in overall headcount. Another example is in our individual solutions business in The United States where we have reduced the number of software subscriptions. In the coming quarters, we expect to see a more gradual delivery of expense savings.

While we will continue to execute on our expense savings initiatives, we also need to absorb expense inflation and other upward pressures on expenses. In addition, some of the larger initiatives are still in progress and will take some time to fully execute. An example is Aegon Asset Management's migration to a new technology platform for its global operations that will drive expenses down and make the business more scalable and client focused. Next to the expense savings, we benefited again from lower travel and marketing activities due to the impact of the COVID-nineteen pandemic. These benefits have started to fall compared with previous quarters and we expect them to go to zero over time.

Furthermore, we aim to profitably grow our business by improving customer service, enhancing user experience and launching new innovative products. These growth initiatives resulted in €30,000,000 of expenses in the last four quarters. Let me now turn to slide 11. In the 2021, our operating result amounted to €443,000,000, a decrease of 16% compared with the same period last year. The apples to apples decrease is 13% at constant currencies when adjusted for the reclassification of the operating result of our CEE businesses to other income.

The decrease in the operating result was driven by adverse claims experience in The US, which amounted to €93,000,000. Deaths that were directly attributable to COVID nineteen were in line with our expectations relative to US population deaths. Furthermore, we saw a higher number of claims due to respiratory diseases this quarter. While the death certificates did not attribute all of these benefits to COVID nineteen, we believe that some of them are related to the virus. Deaths directly and indirectly attributable to COVID explain approximately one half of the adverse claims experience.

About a quarter of the adverse mortality experience related to a higher average claim size. In line with our aim to improve our risk profile, we want to reduce the volatility and mortality experience and we're in the process of exploring management actions to achieve this. The remaining adverse mortality was from increased frequency in line with what we have seen in the wider industry this quarter. The adverse mortality experience was partly offset by €23,000,000 of favorable morbidity experience in the long term care book, which included a €14,000,000 release of the incurred but not reported reserve. In The Netherlands, the operating result increased by eight percent to €190,000,000 All lines of business contributed to the higher result supported by the benefits of expense savings, business growth and favorable disability claims experience.

In The UK, the operating result increased by 47% to €51,000,000 driven by higher fee revenues as a consequence of favorable equity markets. The operating result from international decreased by 17% to €36,000,000 However, on an apples to apples basis and at constant currencies, the operating result increased by 18%. This reflects business growth and favorable claims experience in Spain and Portugal and a reduction in crediting rates at Transamerica Life Bermuda. Finally, Management remained stable at €58,000,000 Higher management fees offset a normalization in performance fees from Aegon's Chinese Asset Management joint venture compared with last year's exceptional level. Let us now turn from operating result to net result on the next slide.

As you can see on slide 12, the net loss amounted to €60,000,000 for the 2021. Non operating items contributed to a gain of €9,000,000 before tax. Realized gains on investments of €132,000,000 and net recoveries of €7,000,000 more than offset a loss from fair value items of €130,000,000 The latter resulted from an increase in the fair value of liabilities in The Netherlands. This was driven by an increase in inflation expectations and to a decrease in the own credit spread used to discount certain liabilities. Other charges of €559,000,000 were largely driven by a €470,000,000 charge relating to the expansion of the variable annuity dynamic hedging program in The United States as well as to the lump sum buyout program in line with prior guidance.

One time investments related to the operational improvement plan amounted to €64,000,000 I'm now turning to slide 13 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 two percentage points during the quarter to 446%.

The RBC ratio was adversely impacted by negative separate account returns in the variable annuity business. Interest rate movements during the quarter result in a loss on the macro interest rate hedge that was scaled up in anticipation of the expansion of the dynamic hedge program. The capital release from the lump sum buyout program was offset by the impact of expanding the dynamic hedge program. This led to a combined negative impact of two percentage points on the RBC ratio in line with prior guidance. In The Netherlands, the Solvency II ratio of the Dutch Life unit remained stable at 172%.

Negative market impacts from rising inflation expectations and credit downgrades more than offset positive impacts from real estate revaluations, mortgage spread tightening, and a flattening of the industry curve. Operating capital generation had a positive impact, which more than offset the €25,000,000 dividend payment to the group in this quarter. Scottish Equitable, our main legal entity in The UK increased its solvency ratio to 171%. Strong operating capital generation had a positive impact and there were some benefits from a number of smaller one time items. Let us now turn to the development of cash capital at holding on the next slide.

As anticipated, cash capital at the holding decreased during the quarter to around the middle of the operating range. In the third quarter, remittances amounted to €99,000,000 These were in part driven by capital released as a result of winding down both our Irish corporate insurance entity and our internal reinsurer Blue Square REIT. These remittances contributed to free cash flows to the holding, were €62,000,000 this quarter. This brings year to date free cash flows to three twelve million euros and puts us in a good position to exceed the 2021 free cash flow guidance that we provided at our Capital Markets Day. These cash inflows were more than offset by the payment of dividends and previously announced redemption of $250,000,000 U.

Dollar perpetual capital securities. Capital injections amounted to €53,000,000 and were mainly driven by an injection into our Brazilian joint venture that we had flagged last quarter. Other items led to a cash outflow of €29,000,000 driven by the previously announced share buyback in the context of variable compensation plans. Let me now turn to our financial assets starting with The U. S.

Variable Annuities business on slide 15. We are taking both bilateral and unilateral actions to maximize the value of our U. S. Variable Annuities business. Last quarter I highlighted two of them, the lump sum buyout program and the expansion of our dynamic hedging program.

The lump sum buyout program was launched in July. This program was made available to certain variable annuity policyholders with guaranteed minimum income benefit riders. The program reduces Transamerica's economic exposure at a favorable price, reduces hedge costs for the remaining variable annuity portfolio going forward. At the end of the third quarter the take up rate of the program amounted to 8% which is encouraging and exceeds those of similar programs run by Transamerica in the past. We have decided to extend the program to the January 2022 to allow customers more time to consider the offer.

We expect the take up rate by the January 2022 to exceed the original expectation of 15%. In the 2021 Transamerica also scaled up the existing macro hedges in anticipation of the transition to a dynamic hedge program for all remaining legacy variable annuity policies. The dynamic hedging program was expanded in the October and now covers the interest rate and equity risks embedded in the guarantees of our entire variable annuity portfolio. This builds on the dynamic hedging program that we have operated for policies with guaranteed minimum withdrawal benefits where the hedge effectiveness for the targeted risks amounted to 98% year to date. Dynamic hedging stabilizes cash flows and reduces our sensitivities to changes in equity markets and interest rates on an economic basis.

The combined impact of extending the dynamic hedging to the full portfolio of variable annuities together with the execution of the lump sum buyout program was in line with prior guidance with a two percentage points negative impact on the RBC ratio. Another action that was implemented in the third quarter was an increase in rider fees on part of the variable annuity portfolio. Certain contracts allow policyholders to elect a step up of the guaranteed base on a policy's rider anniversary if the policy's account value exceeds the guaranteed base. Transamerica will increase the fees to the contractually allowed maximum when a step up is elected. This is a good example of our ongoing commitment to actively manage this financial asset.

In short, the unilateral and bilateral actions to maximize the value of our variable annuity portfolio are well underway. Therefore, we have begun allocating internal resources to investigate our options for potential third party solutions. We will update the market on our progress in this respect in the 2022. Let's now go to slide 16. We have progressed well on the in force management of our long term care book.

In the 2021, Transamerica obtained regulatory approvals for additional rate increases of $133,000,000 bringing the value of approvals achieved year to date to $3.00 $9,000,000 This means that we have already achieved the expected $300,000,000 benefit from this program, which underscores our track record of achieving actuarially justifiable rate increases. Based on these better than expected results to date, we have increased our expectations for the benefit from the current rate increase program from $300,000,000 to $450,000,000 Long term care claims for the third quarter came in at an actual to expected ratio of eighty three percent. The level of new claims has returned to pre pandemic levels. The claims experience reflects a 16,000,000 US dollar release of the incurred but not reported reserve that was previously set up for delayed long term care claims. Excluding this release, the actual to expected claims experience for the 2021 would have amounted to 95%, reflecting increased claims terminations due to the impact of the COVID nineteen pandemic.

Let me now turn to slide 17. Our aim for the Dutch Life business is to turn it into a low risk cash generator paying predictable regular dividends. The Dutch Life business again remitted €25,000,000 to the group in the third quarter in line with its quarterly remittance policy. Solvency II capital ratio of the Dutch Life business remained unchanged this quarter at 172% and was again above the operating range. In the October, the Dutch Life business implemented an expense inflation hedge to further reduce the volatility of its capital ratio.

To summarize, we continue to actively manage our risk and our capital position, to name a few examples. We've nearly completed the interest rate risk reduction plan in The U. S. We extended the dynamic hedging program to our legacy variable annuities. We expect to exceed our original expectation of a take up rate of more than 15% for the lump sum buyout program.

We increased our expectation for the long term care rate increase programs to $450,000,000 we remain on track to achieve our expense savings target. And we will continue to take actions to improve our risk profile. With that, I pass it

Speaker 4

back to you, Lars, for the wrap.

Speaker 2

Thanks, Matt. So the takeaway from today's presentation is that we continue to drive our transformation forward by delivering on our financial and strategic commitments through the disciplined execution of our operational improvement plan and active management of the in force business. Adverse claims experience aside, the operating result development is encouraging and supported by the disciplined implementation of our operational improvement plan. We have reached important milestones for our financial assets as Matt just laid out. We are benefiting from growth initiatives in our strategic assets and growth markets and we have committed to net zero greenhouse gas emissions targets by 02/1950.

In summary, I am satisfied with how we continue to deliver on our financial and strategic commitments and I would like to open the call now for your questions. In the interest of time, I kindly request you to limit yourself to two questions per person. Operator, please open the Q and A session.

Speaker 0

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

Speaker 5

Great. Thanks, guys. Thanks for taking my questions. So both are actually on capital generation. First, specifically to the third quarter.

Seems like there's quite a lot of moving pieces. Are you able to give an update on your view of the normalized run rate? So I guess, the comparable number to the previous three eighty million dollars pre holding company costs that you provided? And maybe just talk through some of the moving parts for the quarter. And then secondly, related to the medium term view, when can we expect an update to the $1300000000.0.20 '23 target?

And then can you also just confirm whether that included an assumption for a 15 basis point reduction in the UFR? And if so, can you just remind me what the impact of that was? Thank you.

Speaker 2

Matt, thank you very much Andrew for your questions. So Matt, can you take Yes.

Speaker 3

So maybe I can walk you through the operating capital guidance that we have now for the full year. And I can walk through some of the moving parts here. So if you take the 3Q operating capital generation after the holding and funding expenses, that was €327,000,000. Add back the holding and funding expenses and you get to three ninety operating capital generation again before holding and funding expenses. And then some of the puts and takes, I mean, we had the as I mentioned earlier, we we had adverse claims experience on the mortality side.

We had benefits on the morbidity side. But if you back that out, that's that's it adds about 60,000,000 to the to the run rate. And then we did have some some some good guys that you have to back out to. So and in general, you can you can walk through it, but it's about 50,000,050 million euros. So that leaves you with a clean run rate for the quarter of about €400,000,000.

And then as you look forward to the end of the year, we have we actual year to date operating cap gen within the business units before the holding and funding expenses amounted to about €1,100,000,000. Add the 400 clean from the, you know, the run rate for the fourth quarter and then subtract out our expectations for COVID in the fourth quarter, which amounts to about €40,000,000, and then take about 10 out for the impact of the dynamic hedging. Remember that does reduce the the operating capital generation going forward, and you get to right around the midpoint of that 1.4 to €1,500,000,000, range that we that we communicated last quarter and that and we're gonna retain that for this quarter. I hope that, I hope that helps.

Speaker 2

And the the medium term view? Yeah. And whether and whether it includes whether the target includes the UFR reduction.

Speaker 3

Yeah. Right. So so you're right. So in so at the Capital Markets Day, we had included a 1,300,000,000.0 target for 02/2023. That did not, by the way, include any impact from the the 15 basis points reduction that we would now anticipate not happening in 02/2023, which would actually add another about 100,000,000 of operating capital generation.

But there we always remind people that there are some headwinds here. We do have still continued low interest rates. Credit impairments are likely to to step up here. We're not changing the guidance at this moment in time, but in general, we're we're getting the benefit from headwinds, and you can see it coming through in our operating cap gen guidance for for 02/2021.

Speaker 2

Great. Thank you

Speaker 5

very much. Very clear.

Speaker 0

Michael Huttner from Berenberg. Please go ahead.

Speaker 6

Thank you very much. Can you talk a little bit about the take up rate expectation, what you're seeing, where we are now at the October or actually mid November in terms of take up? What kind of impact this could have in terms of RBC. I think at September, the 8% was 3.5%. And I was trying to gross it up, but I'm not very good at math.

And then the other question is on the morbidity. So I understood from your comments, 23,000,000 in Q3, including GBP 16,000,000 of reserve releases. Are we kind of done with morbidity benefits? Or is there potentially still more to come? Or is the €300,000,000 pricing you've spoken about, will we see that in the numbers?

Thank you.

Speaker 3

Yeah. So let me take your take up rate question first. So indeed, the the experience on the the lump sum buyout program through September stood at 8%. If we looked at it yesterday, it was about 14%. And that's you can't really extrapolate that going forward because the the program itself ended at the October.

And as you might expect, a lot of the the take up came at the very last part of it. So as of right now, it's about 14%. Now what we are going to do is extend that offer forward through the January in 02/2022. So that 14% will will accumulate. It'll get it'll get bigger, but probably at a slower pace than what we saw in the first in the first stage of the program.

With respect to the the morbidity experience, yes, indeed, you know, we are we are still getting morbidity benefits. However, we see that the entrances to long term care facilities are picking up in line with pre COVID levels. We are going to be you saw that we released a portion of the IBNR reserve in the fourth quarter or sorry, in the third quarter. We'll release the remainder of the $44,000,000 IBNR reserve pretty much levelly throughout the throughout February. On the on the rate increases, indeed, we had exceeded our expectations on the the long term care price increases.

So now we stand a little bit more than 300,000,000, and we are extending that and we now put a target out there of 450,000,000. The a 100,000,000 of that is gonna be reflected in in what we say our premium deficiency reserve by the end of the year, And the balance of that will come in over time. You'll see it reflected in capital generation over time. The the other question that you had was the also impact on r b on RBC. In the so the the overall program impact was three and a half percent.

So it it improved the ratio by three and a half percent. And and we would expect that again, it it'll you know, we're gonna extend the program that, again, that was based on a based on the 8% take up rate. We would expect to get incremental improvements through the January, and we'll see that come through in our in our RBC ratio by the end of the year and and also into the also in the first quarter of next year.

Speaker 6

Brilliant. That's very helpful. Thank you.

Speaker 0

David David Barron from Exane BNP Paribas. Please go ahead.

Speaker 5

Hey, Kieran. Good morning. On on US variable annuities, just to just to come back in on on that, in light of your of your high expectations for the buyout pickup rate and your comments, Matt, on on fee increases in some contracts. Can you remind us what you expect for the run rate capital generation on that that line to be, please? And then secondly, on US mortality, so quite high in the quarter, and I assume that splitting COVID related from the rest is a bit difficult, but any color on underlying trends would be would be helpful there.

And also, say you wanna take actions to reduce the sensitivity to to mortality. How how do you plan to to achieve that? Thank you.

Speaker 2

Yeah. Thanks, David. So, Matt, over to you again.

Speaker 3

Yeah. So on the the VA run rate capital generation, in the last quarter, we had we had said that we would reduce operating cap gen by about $50,000,000 as a consequence of implementing the both the also program and the or the the lump sum buyout program and the dynamic hedging, and that we would be in a in a range of 200 to fifth 250 to $300,000,000 operating cap gen on an annual basis, and we're retaining that guidance. So we came in pretty much exactly where we thought we were going to be. So the number is two fifty to three hundred on an annualized basis. Maybe on the mortality in The US, I mean, the way that we really think about this is that we did have could say the impacts of direct and indirect COVID claims that represented about one half of the adverse experience that we saw in the quarter.

So if you work in US dollars, we had a $111,000,000 worth of adverse mortality experience. Part of it was directly related so that, you know, that's this is the case where I think it was forty six million of that was related to COVID deaths where we get a claim in and we get a death certificate and it's written COVID nineteen as the cause of death. But as I said in the my opening remarks, we're also seeing elevated claims from things like respiratory illnesses which are which are guiding us saying that there there is a portion of other claims that are not directly COVID related that are more indirectly related. And if you add those two components up, then it's then it's like one half one half of the total amount of the deviation. The other part of it is we did have an increase in the overall average claim size during the course of the quarter which which contributed to about one quarter one fourth of the overall more poor mortality experience.

This is just what I would call normal average size claims deviation. We did see a number of higher higher face amount contract claims that came in during the course of the quarter. You asked the question around management actions and indeed we are gonna try to take some steps here. This is typically done through reinsurance and we will be looking at that to minimum or to to reduce the amount of, let's say, the the the claims volatility in terms of case size. And then the remainder of it is we would attribute it to just frequency number, you know, they were just a higher number of claims during the first quarter, which was quite consistent with what we had seen in The US industry.

So I think that will come as no no surprise.

Speaker 4

I think that covers your questions.

Speaker 0

It does. Thank you. Pauline Liang, Morgan Stanley. Please go ahead.

Speaker 7

Thank you. Two questions, please. The first one is about your deleveraging plan because if it I look at your holdco liquidity, it's, like, in the middle of your kind of target range. And but, the the the the total leverage is still above your long term target. Still apparently, you still need to go to do another further half to $1,000,000,000 deleveraging.

Originally, I thought that would be kind of with the CE deal be completed, that would kind of give you the cash to do that. But now with the CE deal kind of pending, would you actually kind of still going ahead with the delevering target? Or your deleveraging is actually conditional on the CE deal completion? So that is one first question. On the second one is, I'm still a little bit just clarify a bit number.

You kind of iterated your 1,400,000,000.0 to $1,500,000,000 clean capital generation guidance kind of for 2021, but your original strategic plan was $1,300,000,000 for 2023. So there seems like a kind of disconnection there. Could you kind of talk me through about what's the moving blocks between the current higher target versus a slightly lower target in two years' time? Thank you.

Speaker 3

Yes, certainly. So on deleveraging side, so we are a hair below or at the midpoint of the operating range for cash capital at the holding. But I would just remind you that we typically get relatively low dividends in and remittances from the business units in the third quarter. A lot of the remittances come in the fourth quarter, so that's not a particular concern for us. With respect to the deleveraging target, we're committed to doing that 5% to 5.5 whether CEE closes or not.

So we are going to we are gonna continue with our deleveraging plan there. With respect to the the capital generation, so what we're what we're targeting here is a one point four to one point five billion euro operating capital generation in business units for 02/2021, and that includes everything. So that includes the, you know, the effects of adverse mortality. But it does include also the, you know, the the benefit that we are getting from tailwinds in the equity markets to a certain extent the the interest rate markets as well. Whereas when we came out with our capital markets guidance back in December, we were anticipating some pretty nasty markets.

So low equity markets, we were anticipating, you know, still the level of still the level of COVID claims, although they're coming in a little bit higher and longer than what we had anticipated. So I guess the point here is that there's gonna be if we if markets stay the way that they are, there will be a moment in time when we'll have to adjust that longer term guidance. But for right now, we're not going to do that. We're gonna stick with the guidance that we do for 2021 and go on.

Speaker 7

Okay. That's clear. Thank you.

Speaker 0

Thank you. Michel Balattoir from KBW. Please go ahead.

Speaker 8

Yes. Thank you. So two questions. So the first question is about the CE. I mean, what is the status there in terms of, you know, the the the how is proceeding?

I mean, there there is an EU probe on the Ungari's veto. Do you think there would be a point where Vienna Insurance Group will say, well, you know, that's just not feasible? So just an update there. And the second question is about solvency. And on solvency, especially the so you had the positive effect on the RBC coming from the a better experience in mortgage in mortgage foreclosure.

You had a negative impact in The Netherlands from inflation. I want to just have a sense of this trend, how will this will evolve in the coming quarters? Thank you.

Speaker 2

Yes. Thanks, Miguel. So on the Vienna Insurance Group, so we to remind everybody, we sold the business in Hungary, Poland, Romania and Turkey to the Vienna

Speaker 0

Hello. We're experiencing material interruption in today's call. Please standby. Ladies and gentlemen, we are experiencing a momentary interruption to this conference call. Please continue to standby.

Speaker 8

Thank you, Darius.

Speaker 0

Please go ahead.

Speaker 2

Hi. I apologize to everybody. We had a little bit of a glitch in the line. I hope all of you are still there. So Michele, thank you very much Yes.

For your So again, the Vienna Insurance Group is in the lead of getting all the required approvals and they are busy doing that. We are supporting them in that effort, of course. When it comes to Hungary, they are still in constructive dialogue with the Hungarian government to try to find a way to resolve the situation, and we are just patiently awaiting the outcome of that. And then when it is when we talk about the solvency, etcetera, so Matt, can you take that piece of the question? Let me get it.

Speaker 3

Yes. So I think your first one, you're thinking about how much of these points that you would raise with respect to the the RBC ratio, for example, in The US related to that that that mortgage thing and the and the and the Dutch inflation expectations. On the first the first one in the RBC ratio, that that mortgage thing is really a one off, so it doesn't have any so it's actually a very small movement in the RBC ratio. On the Dutch inflation side, they ended up the they ended up the the quarter at 172% solvency, and that was negatively impacted by increased inflation expectations that they have to reflect in the in the value of the liabilities. But after the but after the quarter ended in October, they did put on additional inflation hedges.

So now the the movement in own funds related to future inflation is really immunized. So that has no further impact. Okay. Thank you.

Speaker 0

Our next question comes from Henry Heathfield from Morgan Morgan Star Morgan Star Morningstar, sorry.

Speaker 9

Good morning. Can you hear me? Can you hear me? Yes.

Speaker 2

We can hear you, Henry. Good morning.

Speaker 9

Great. Good morning. Thank you very much for taking my question. Actually, just one question.

Speaker 6

Really on this just coming back

Speaker 9

to this VA take up rate that's been set at 15% for end of Jan. If you can really excuse my ignorance here. I don't mean to sound rude in this question, but 15% sounds like quite a low number. And so I'm just wondering if you could kind of outline how you set that number, you set that target, and what it really relates to in the grand scheme of things. Did you understand what I'm I'm trying to get at?

Speaker 2

No. Not not not quite, but could you please elaborate? Because our take up rates at the September was 8%. Yeah. We have we have expressed that we believe that the 15% would be a real success.

By now, so we're now post the quarter end. We're now since yesterday, we're at, you know, nearly 15% at 14%, and we are extending the program to the January. So we expect actually to exceed the 15% rate that we internally regard as success a very successful one. Yeah.

Speaker 9

I'm I'm I'm not disputing I'm not disputing the the 15% wouldn't be a successful level. I'm just saying, essentially, in my very limited understanding, 15% for me from the outside sounds like a a low number in terms of you're offering Okay. A buyout of 15% a buyout to policyholders. And then 15% of those policies are probably 50% of those policyholders taking up that buyout offer. So just from an outside perspective, not understanding internally what, you know, what kind of levels which, you know, are normal than and normally expected.

You know, 15% is just down, you know, out of effect is quite quite a low number for a take up. I will not say that that's an unsuccessful number in any way.

Speaker 2

Yeah. So so yeah. And I know I understand where you're coming from. So let me start, Henry, and then then Matt will expand on this. This is not our first rodeo.

Yeah. In fact, this is this is the third time that we're doing an also program like this. So Transamerica is quite quite, let's say, experienced in this. So we know how it works, we know how to what kind of rate of take we can expect, we know how how in the entire process the dynamic around the take up works. So in that sense in that sense we are we are are experienced in this.

But Matt you may want

Speaker 3

to expand on what the financial benefit of this is because we're releasing the economic value to liabilities. Yes, I mean maybe just to expand on what Lard said, obviously exactly right. So we have hit this book before with previous offers so that, you know, many have taken it in the past. So now we're the third time after this, and I think a 15% take up rate would be a reasonable result. We think we can get beyond that, by the way, but but that's really based on the the or at setting our expectations based on prior experience also with this block.

That's how we that's how we kind of set our target. Maybe to put a little bit more specific mass around this. So the 8% take up rate resulted in capital generation of about 80,000,000 US dollars during the course of the the third quarter, and that's generally pretty linear. So to the extent that we get a higher percentage, then you would see commensurate levels of capital generation going forward. And as I I think we said earlier that, you know, currently, we're standing at 14%, you know, on the road to 15, and we'll we'll likely surpass 15.

Speaker 9

And that take up rate is a percentage of, obviously, holders that are offered except for the offer essentially. I mean, it's take up, right, we say.

Speaker 3

Yes. Exactly. Yes. Exactly. Right.

Okay.

Speaker 9

Thank you very much. Appreciate it.

Speaker 2

Thank you, Henry.

Speaker 0

Benoit Petrarch from Kepler Cheuvreux. Please go ahead.

Speaker 9

Yes, sir. Good morning, everybody. Yes. My question is actually on the inflation. I mean, The US inflation figure, which was pretty high actually yesterday, and we could get more inflation in The U.

S. Next year. So just wanted to understand how that could play on your U. S. Business.

Normally, there is a kind of offset with higher interest rate, but you've hedged that a lot now. So all The U. S. Inflation, higher inflation will could play on metrics like operating capital generation. I wanted to understand what you have there in terms of assumptions.

And also on the long term care business, whether you should expect maybe some headwinds from that. And if actually the price increase you've been getting this quarter is actually an offset to higher inflation going forward. So that's more kind of broad question on kind of how The U. S. Inflation could impact your business going forward?

Thank you.

Speaker 2

Yes. Been a while. I'll hand over to Matt. I mean, we all know there's a debate in the market ongoing to whether this inflation is temporary in nature or not, but let's not speculate on that, Matt, the question that Edouard just had on inflation.

Speaker 3

So maybe I can do inflation for kind of the in a broader sense, but I'll come back specifically to The U. S. In one second. So on the first thing that I would say there are three main areas when we think about inflation risk that we have to think about. The first one relates to the expense savings program that we have out there.

So we have a a 400,000,000 expense savings program where we, you know, we we are going to be facing headwinds from increased inflation. We did embed inflation expectations into that overall savings, but that could be a, you know, potential area where where we would have where we would be where where if there's more more than moderate levels of inflation, then we could be at a little bit of at risk. But I would say that and you've seen it in the presentation that that we are on track to make it to to hit our target here with respect to that 400,000,000 pro program. The other one relates this is more to The Netherlands and it relates to the the inflation risk on the capital position. But as I said in a in in an earlier answer, it looks like we have that one pretty much fully hedged both from a standpoint of in the expense inflation risk within the capital, but also with with respect to the contract guarantees that we have for certain pension contracts where it's been where a lot of that has been hedged from the very beginning, and we've expanded that program.

So so from a Dutch solvency ratio perspective, I think we've got that one. I think that we've we've got that one covered off well. And so now to get to The US, you you mentioned, you know, particularly the long term care business, and that's where we are the most exposed to to inflation risk. I always have to remind people that in the long term care business, we're not thinking about medical inflation. We're talking more about general wage inflation.

So there there's a couple aspects to this. I guess the first one is that the the way that the benefit is constructed to the contract holder, there are maximum amounts both at the daily level and at the policy level that we would pay out. So, you know, in a way that is a that is a cap to our inflation risk after that when the policyholder is really taking on that risk themselves. The other offset that we've seen happen in in the in the long term care business is there's more of a tendency to seek at home care rather than to enter into a long term care facility. We see that the expenses related to home care, at least as far as our book is are concerned, are about 25% less than that they would be in a long term care facility.

So there is, you know, potentially some some offset. The other one is that, you know, we have we've gone actively to long term care contract holders to think about reducing the levels of their daily benefits and in return for a lower premium or not having that next premium rate increase. And by lowering that daily benefit or by lowering the policy benefit, then we have an opportunity to mitigate the risk inflation going forward in that book. So it's something to it's something to watch out for. In general, if we get higher inflation where it's paired up with higher levels of interest rates, then then that's actually a good thing net net for us.

Even though we have closed a lot of our interest rate gap or interest rate exposure there, we do we do benefit from higher interest rates. So it's it's a little bit of a mixed bag as far as as far as we're concerned, but it's so I I I think that's about it.

Speaker 4

Okay, Greg. Thank you.

Speaker 0

Next question, Robin van den Broek, Mediobanca.

Speaker 4

Yes. Good morning, everybody. Thank you for taking my questions. Yeah. The first one is on remittances.

Year to date, you've you've come close to 500,000,000. You alluded in the call before that q four is more of an interesting quarter when it comes to remittances. So given your RBC ratio is also at very healthy levels, but what should we expect there also versus your target? And I was also wondering if you could include in that comment what kind of regulatory movements we can still expect. Are these asset charges changing changes finally coming through in Q4?

And secondly, I guess, Lark, since you first started as CEO, you you haven't had much much opportunity to travel and visit the business units. But over the last few months, I'd I'd assume you you had some opportunities to do so. I was wondering if you wanted to share your experience from that. Thank you.

Speaker 2

Yes, of course, more than happy to do so. So Robert, thanks for your questions. Yes, indeed, I started as CEO in the middle of the pandemic. So I did not have a lot of chance to meet many people in person. So I've spent I've been spending a lot of my time, like all of you by the way, assuming my life away if you will.

But but over the last months and certainly after the summer, spent quite a lot quite a number of weeks in The US, you know, together with our new management team there. And, you know, a couple of observations that I have there. What number one, I I went to see a lot of distribution actually. And and what I found is, we all want to get Transamerica back, right? I mean Transamerica was a market leader in The U.

S. And has lost market share over the last year. So we want to improve it. So I've hired a new team. We're having all kinds of plans to turn that business and make it much better performing and growing faster.

And the good news that I found from all those conversations with distribution is that Transamerica is just a fantastic brand that and many people want Transamerica back at the top of the league tables. So I think that's one thing that I would have as a takeaway. Secondly, I would have as a takeaway that the new team that we put in that we recruited there. So Will Fuller as the CEO and Chris Ash as the new CFO, but also you know many other appointments that we have made. So we have have appointed a new well let's say counterpart to Duncan Russell.

So it's it's for Duncan the key person in the in The US to work with, Chris Giovanni. And we have also appointed a number of other financial talents and appointed Matt Keppler as a head of financial assets. All people who are highly experienced in this, who we have worked with before. And as a result, I was also quite pleased to see how they have settled in and how they are working to increase the value creation out of the variable annuity book, but also the clear separation between what we call financial assets and the focus on growth and growth assets and growth product lines. I think that's in a much better place.

There's more focus in the business and there is good excitement and enthusiasm. Of course, despite of the COVID pandemic, right, because we still see a back and forth on how people can get back to the office. I spent time with the sales teams in The U. S. Both in the retirement side as in the individual solutions side.

I spent time with WFG. Last week I spent time with a lot of our financial distribution partners and actually next week I'm again in The U. S. To talk to distribution to work with Will on the plans for growing the business further. So I must say that was I'm spending more time on the ground with the teams.

I love to do that as you may know, but so that's really good. And at the same time, I've also spent time in The UK business, etcetera. So yes, will not make this a travelogue, but I can tell you that it's just I find it personally as you know quite a lot of fun to work hard in improving this business. But with that the remittances I think that's something that's on your mind. So, Matt, the the the questions are dropping around remittances.

Speaker 3

Yes. Just as a brief reminder here, the the Capital Markets Day guidance we gave for gross remittances for 2021 was something in the 600 to 700,000,000 range. And you you also you also remember that we're trying to tie our cash dividend to our sustainable free cash flows. And you'll remember from last quarter, we had increased our dividend interim dividend by 2¢ a share, which gives you a little bit of an inclination where we think that free cash flow is going. So in fact, it's right.

So we are now the minimum amount of gross remittances that we'll get out of the units for the full year are say 750,000,000 again at a minimum. I think, Robin, you also asked about any other regulatory movements. I would point out the one that the one the one that you had called out. We still do have a change in the the risk based capital factors for certain asset classes within The US. There's a it's a negative impact on credit.

It's a bit of a positive impact on real estate. But net net net, you're talking about perhaps 10 percentage points negative on The US RBC ratio, and that will be reflected in the fourth quarter result.

Speaker 4

That's great, guys. Thanks.

Speaker 0

And we will now take our last question from Parquhar Marek from Autonomous Research. Please go ahead.

Speaker 10

Just two questions from my side. Firstly, on the inflation hedge that was put on, could I just get a sense of what whether there was a cost to that going forward on a per annum, particularly with regards to capital generation? And, certainly, just into the IP offer take up, just to be precise, should I take it that essentially the RBC ratio struck on the 8% level take up that you had at the the we keep point. And and I think you kinda have to give some sensitivity, but I presume it's a couple of points on extra on top of that given that we're going from 8% towards 14% or something more. Is that fair?

Thanks.

Speaker 3

Yes. So on the inflation hedge in The Netherlands, what's the impact on capital generation negligible? On the take up rate in The U. S, yes, the take up rate was 8%. I think we did the math on that to say that 8% relates to about 3.5% on the on the solvency ratio, a little bit a little bit over 7 a little bit over $70,000,000 in capital generation.

It was struck at that moment so that we would anticipate further positive impacts as that goes forward. One thing I would mention is that you remember that we did take a charge of about 560,000,000 US dollars related to related to the combination of the the the lump sum buyout program and the dynamic hedging. But on that one, we anticipated further movements in these kind of things. So you're not gonna see that, you know, continue to bleed in over over time. So we've taken all the impacts for any future for any future take up rate improvements all in this quarter.

So capital impacts come and then we've already taken the negatives on the on the the the IFRS equity.

Speaker 10

Alright. Thanks very much.

Speaker 2

Thank you, Farber.

Speaker 0

Thank you. With this, I will like to hand the call back over to Jan Willem for any additional or closing remarks.

Speaker 1

Thank you, operator. This concludes today's Q and A session. On behalf of Lard and Matt, I thank you for your interest. Should you have any remaining questions, please do get in touch with us in Investor Relations. We're happy to help.

Have a good day and thank you for your participation in today's call.

Speaker 0

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen.

Speaker 8

You may

Speaker 0

now disconnect.