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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Aegon Second Quarter 2021 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 Weidema, Head of Investor Relations. Please go ahead, sir.
Thank you, Stewart. Good morning, everyone, and thank you for joining this conference call on Aegon's second quarter 2021 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 CEO, Lard Friese; Chief Transformation Officer, Duncan Russell; and CFO, Matt Rider. Let me now hand over to Lard.
Thanks, Jan 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 Rider 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&A session. So let's move to Slide #2. 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. The second quarter of 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 claim experience in the United States. We have made good progress on the implementation of our expense savings program and have seen a EUR 220 million reduction in annual addressable expenses through the second quarter. This strengthens our confidence in our ability to deliver on the 3-year target of EUR 400 million expense savings. Our balance sheet remains strong, with the capital ratios of all 3 main units currently 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 2 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 U.K. 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. Aegon 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've also continued to improve our risk profile, having already executed around 2/3 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 EUR 0.25 per common share by 2023. Therefore, we are announcing today an increase of our interim dividend by EUR 0.02 to EUR 0.08 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 USD 250 million professional 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 #3. Our ambitious plan comprises more than 1,100 detailed initiatives designed to improve our operating performance by reducing costs, 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 million. 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 EUR 220 million of savings, which is more than half of our EUR 400 million expense reduction target. That strengthens our confidence in our ability to deliver on the target for 2023. Initiatives aimed at improving customer service, enhancing years of experience and launching new innovative products are also well underway. These growth initiatives contributed EUR 26 million to the operating result in the second quarter of 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 4 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 the top 5 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 products and the application process. Volume growth, a more favorable product mix and lower expenses resulted in a 40% increase in the value of new business. The U.S. retirement business, Transamerica, aims to compete as a top 5 player in the new middle market sales. This business continued to build momentum, with the fourth consecutive quarter of written sales of over USD 1 billion 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 1/3 of this quarter's middle market sales. So let's turn to the Dutch strategic assets on Slide 5. We are a market leader in both mortgage origination and new style defined contribution pensions, and we continued our momentum in the second quarter. We originated EUR 2.9 billion mortgages in the second quarter benefiting from a strong housing market. Mortgages under administration reached a record high of EUR 58 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 EUR 5 billion mark for the first time and is scoring Aegon's leading position in this market. We want to develop the online bank, Knab, into a digital gateway for individual retirement solutions. Knab continued its growth trajectory and added more than 5,000 customers in this quarter. In the United Kingdom, assets under administration reached GBP 200 billion 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 GBP 1 billion, which included a significant Master Trust contract win. This underscores that we are well positioned in this fast-growing market of multiemployer 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 management and our growth markets on Slide #6. 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 EUR 2.1 billion 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 2 percentage points. This resulted from higher revenues from net deposits, favorable market developments and higher origination fees in Aegon's Real Assets business. These origination fees were driven by responsible investing mandates in workforce and affordable housing. Net deposits and strategic partnerships were EUR 815 million 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 EUR 56 million. 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 EUR 28 million as a result of new product launched in Spain and Portugal. Here, sales from our Spanish bancassurance 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 #7, 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. Travel Annuity business. So Duncan, over to you.
Thank you, Lard. 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 actions, steps we can take ourselves and bilateral actions, steps that we can take in conjunction with other stakeholders. I would now like to highlight 2 recent actions that we have taken on the Variable Annuity business, which in total had USD 85 billion of account value. These actions demonstrate our approach to managing our financial assets. The 2 actions we are announcing today are aimed at reducing our risk exposure to the legacy block of business with income and debt 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 USD 6.5 billion and mainly consists of policies sold by Transamerica from the 90s until 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 of 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 receipt of 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 20 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 exposures, achieving a 15% take-up rate once it is fully completed, it will 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. The expanded hedge will build on the 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 incur the expansion as of the fourth quarter when we have more clarity on the outcome of the buyout program, and 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 2 actions, expanding the dynamic hedge and a lump-sum buyout program, it is expected to be less than 5 percentage points on the RBC ratio. That assumes that market stay around the current levels, and that we do not see extreme market movements before 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, and 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 GMDB rider. We would expect annual operating capital generation to be around USD 50 million lower than otherwise would have been the case. Looking forward, we will 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 onetime pretax other charge of approximately USD 500 million to USD 700 million in the first quarter of 2021, mostly driven by a noncash write-off of deferred acquisition cost. 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 that our statutory reserves will effectively move to a fair value basis and move away from the regulatory prescribed grading to a 3% long-term interest rate assumption. But inherently hedging interest rate risk embedded in the guarantees 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 2 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 have 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., up 34 percentage points on the RBC ratio for a 25% drop in equity margin.Second, we will remain exposed to risks from changes in realized and implied volatility. We consider 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 impedance of the valuation of our variable annuity guarantees. Implied volatility tends to be higher than actual realized volatility, which makes it expected to hedge. And despite an implied volatility, it tend to mean revert. Our 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 is costly to fully hedge the impact of realized volatility in the convex instruments like options or variance swaps. Therefore, we 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 is to proactively manage our risks, exposures and profitability in order to improve the net worth and value of these businesses. We have allocated resources for the defined factors 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, thus 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 this. But we will now allocate internal resources to investigate our options around potential third-party solutions. We aim to be transparent on our consideration for this topic and how we intend to maximize the value of the variable initiatives. So we will provide an update on our progress sometime in the first half of 2022. With that, I'd like to hand over to Matt.
Thanks, Duncan, and good morning, everyone. On the next several pages, I will take you through the highlights of our second quarter 2021 results and on 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 EUR 562 million. Our balance sheet remains strong, with the capital positions of all our 3 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 EUR 1.4 billion. 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 EUR 6.1 billion at the end of the second quarter. One of our priorities is the reduction of economic interest rate exposure in our U.S. business. As to the actions discussed by Duncan, we have executed on about 2/3 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 share portfolio. In the second quarter, we obtained approval for additional rate increases worth USD 64 million. This brings the total to USD 176 million and means that we have already achieved over 50% of our $300 million 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 EUR 400 million. In the last 4 quarters, we reduced addressable expenses by EUR 245 million compared with 2019. EUR 220 million 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-19 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 EUR 28 million of expenses in the last 4 quarters, that contributed EUR 26 million to the operating result in the second quarter of 2021. Let me turn to Slide 15 to share with you the most important drivers behind the increase in our operating results. In the second quarter of 2021, our operating result amounted to EUR 562 million, 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 to corporate bonds also contributed to higher earnings. In the U.S. light business, mortality claims experience was EUR 27 million 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-19 as the cause of death. This was offset by EUR 55 million favorable morbidity claims experienced in the long-term care book, which included a onetime reserve release. Correcting for this onetime reserve release, the actual to expected claims ratio was 81% driven by elevated claims terminations as a result of higher mortality. In the U.K., the operating result increased by 19% to EUR 44 million driven by lower expenses and higher fee revenues from growth of the Platform business. The operating results from international increased by EUR 1 million to EUR 34 million. 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 EUR 71 million, 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. Let's turn from operating results to net results on the next slide. As you can see on Slide 16, the net result amounted to EUR 845 million for the second quarter of 2021. Nonoperating items contributed a gain of EUR 644 million before tax. Fair value gains amounted to EUR 468 million 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 EUR 162 million mainly due to gains on debt securities in the U.S., which were sold to fund investments on 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 EUR 15 million. Other charges amounted to EUR 153 million and mainly resulted from more conservative assumptions for variable annuity surrender rates to reflect portfolio and industry experience. Onetime 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 3 main units ended the quarter above their respective operating levels. The U.S. RBC ratio increased by 16% during the 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 benefits 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 in the ratio. Operating capital generation had a positive impact and more than offset the EUR 25 million remittance to the group in the second quarter. Scottish Equitable, our main legal entity in the U.K., increased its solvency ratio to 163%. This increase was primarily driven by a forthcoming increase in 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 regular quarterly remittance from the Dutch Life unit. After deducting funding and operating expenses at the holding, this results in free cash flows of EUR 175 million 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 EUR 1.4 billion, 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 EUR 40 million to enable the business to absorb adverse claims experienced from COVID-19, 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 a 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 EUR 0.02 compared with last year to EUR 0.08 per share. Finally, we continue to reduce the gross financial leverage, as we have announced today our intention to redeem USD 250 million in perpetual capital securities. After the redemption, we will have reduced our gross financial leverage by approximately EUR 700 million since the second quarter of 2020 to EUR 5.9 billion. This puts us on track to achieve our target to reduce gross financial leverage to between EUR 5 billion and EUR 5.5 billion by 2023. With that, I pass it back to you, Lard.
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 EUR 400 million 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. VIG 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. [Operator Instructions] Operator, please open for the Q&A.
[Operator Instructions] The first question comes from the line of Andrew Baker from Citi.
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, the 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 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 very much, Andrew, for your questions. The first one will be taken by Duncan and the second one by Matt. So on U.S. risk management actions, Duncan?
Thank you, Andrew. As indicated, we think the net impact of the 2 will be a -- no worse than a 5 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 has been around USD 2 billion. And once we implement the dynamic hedge, we think that will drop to around about $1.4 billion.
Okay. Matt, the...
Yes. On operating capital generation and, let's say, the remittance outlook. So just a reminder, at the Capital Markets day, we had guided for EUR 1.1 billion operating cash gen from the business units. And in the first quarter call, I guided more to the EUR 1.4 billion. Given the progress that we have made on the operational and previous plan and other tailwinds that we've foreseen 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 EUR 1.4 billion and EUR 1.5 billion for operating capital generation. Now in terms of the remittance guidance, we had been guiding toward something like EUR 1.4 billion to EUR 1.6 billion 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's more -- is in the top end of that range more than the bottom and the middle slope. I think that's...
We will now move to our next question from David Barma from Paribas.
The first one is to come back on the measures on the VA block. So you -- I think the day 1 impacts are quite clear, but you also mentioned that 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?
Thanks, David. So on the VA question, Duncan. And then the Dutch ratio, Matt. So, Duncan, please, over to you.
So 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 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 USD 50 million lower and to be in the range of $250 million to $300 million 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 earned on reserves, et cetera, which also we think is a higher quality source of capital generation. Hopefully, that answers your question.
So Matt, please?
Yes. For the Dutch solvency ratio, I think I agree with 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 -- and real estate revaluations, which I think I mentioned in the opening, those added about 2 percentage points to the solvency ratio. So between those 2 things, markets added about 6 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 5 percentage points to the ratio. And there were some changes to the fixed income portfolio, which added 2 percentage points. Basically, it was a reduction of structured credit exposure. And then there were 10 percentage points worth of various model and assumption updates. I'm not going to get into the detail of that, but I think that should get you to around 172% that we ended the quarter at.
We'll now take our next question from Ashik Musaddi from JPMorgan.
Sorry, I was on mute. Sorry. Just a couple of questions I have is, how do we think -- I mean the 2 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, at least it will help your cost of equity. But does it help you to exit that business as well at some point, i.e., the moment you have like done all the hard work, heavy lifting of hedging, et cetera, 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 out once you have done all those heavy lifting? Or will you want, okay, I have done all this heavy lifting, why not sell it rather than just 1x for cash? So that's the first one. And second thing is to Matt, this thing about capital generation. You mentioned EUR 1.4 billion to EUR 1.5 billion is what you're thinking about at the moment. I mean, clearly, interest rates have dropped from when we discussed about EUR 1.4 billion in first quarter. So clearly, if you're trying to still say that EUR 1.4 billion 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-offs, et cetera?
Thanks, Ashik. So Duncan, on the VA, please, and then Matt will indeed take the capital generation question.
Ashik, I'll try and break down my answer to it. So firstly I think the 2 initiatives that we've announced today are meaningful and do create meaningful value for our shareholders. And part of the reason we're 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 5 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 economic view of the liabilities 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 2 actions are helpful, as we move now into exploring third-party transactions. As we've gotten 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 buy-out program and basically acquiring liabilities back 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 our 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 out. For example, there could be capital implications, capital dyssynergies 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 obviously have a view on value and which we'll be rational around that. And then finally, as I've pointed out to an 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 an operating capital generation basis, roughly USD 250 million to USD 300 million per annum and consume roughly $1.4 billion of capital post the implementation of the hedge.So we have to weigh all those things. And as part of the work, we're going to do in the coming months and quarters and we will love to come back to you at some point in first half '22 on our considerations around that.
Yes. So I can pick up the operating capital generation. So yes, guiding toward EUR 1.4 billion to EUR 1.5 billion 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 the -- we're not so sensitive to interest rate movements on the 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, let's say, the expected increase in the operating cap gen for the remainder of the year. 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 EUR 376 million of operating cap gen after holding and funding expenses, sort of add that back, you'll get to EUR 435 million, and then there were some positive one-offs. We had the combination of mortality and morbidity good guys in the U.S., and there were a couple of other tailwinds from other items within the -- within Europe. You come down to, like, let's say, a clean quarter would be about EUR 380 million for the -- just for the same quarter operating cap gen within the business unit. The first half of the year, we did EUR 723 million. Add 2x the EUR 380 million and then you get to something in that EUR 1.4 billion, something in that EUR 1.4 billion to EUR 1.5 billion space. Depending on what you think COVID is going to do in the last half of the year, we factored in the 50,000 U.S. population desk, called out a little less than half of, let's say, EUR 20 million more or 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 positive morbidity experience. So the EUR 1.4 billion to EUR 1.5 billion seems to be a safe number.
Fulin Liang from Morgan Stanley.
Very good set of results. I got 2 questions. So the first one, the VA, the kind of you're approaching your current existing customers to buy out the policies. I assume that has been -- you have gained regulatory approval. I'm just wondering how you -- and because as Duncan said, you actually buy out these policies under below the economic value of the policies. Well, have you -- how do you assess the kind of litigation risk 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 U.S. because that is also kind of your financial asset. Is -- you kind of -- is a fixed annuity solution will come together with variable annuity book solutions? Or is it a separate consideration?
Yes. Thanks, Fulin. So Duncan, over to you.
So key terms of the buyout program is we are offering our customers an opportunity to strengthen their policies in exchange of cash value. And as I pointed out, these products were sold a long time ago, in some cases, 20 years ago, and the circumstances of our customers could have changed over a period. So they have the ability to exchange or surrender that policy in exchange for cash payment, which is north of their account value and could be attractive to them. But it's obviously at their discretion and their choice, and they'll engage with their advisers on that. We did pre-engage with advisers before launching that program to get feedback, and we have had feedback, constructive feedback since its launch. But it's still very early, and we'll have to see how that progresses over the coming recent 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 is beneficial for our shareholders. The second question was on the fixed annuities, yes, and whether that will come together with 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 a 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 in the coming months and quarters.
We'll now move to our next question from Michael Huttner from Berenberg.
I have 2 questions, but I think, actually, 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 $209 million in the first half? And at what stage when can we see a meaningful rise in this regard? What I'm trying to say is, could we see it already in the first half of '22 or the second half of '23? 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 goes to 20%, what would be the benefit? That's my 2 questions.
Thank you very much, Michael. Let's start with the U.S. cash remittance question, Matt Rider. And then followed by your question on the program by Duncan. So Matt, over to you.
Yes. What I can say there is that -- so just maybe the facts first. So in the second quarter, the U.S. did remit $209 million. That's their normal remittance. They did EUR 18 million 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 EUR 0.02 a share for a reason here. So we're not getting into the detail of remittance guidance within the U.S. But I think that the EUR 0.02 a share increase is showing you something about that, and that is driven by operating capital generation that looks to be in that $900 million to $950 million range in the U.S.
Thank you. Duncan?
Yes. On the second question, Michael, the dynamic here is that we will be paying out cash if and when the policyholder opts out of that option and releasing associated guaranteed reserves and required capital. And we think that, that dynamic is a slight positive for the RBC ratio as indicated. We're not giving a sensitivity. It is very early in that program, and it depends on which policyholders accept, there are specific characteristics, there are 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.
And just a follow-up. You said you've spoken to advisers. And clearly, the program was launched about a month ago. Can you say a little bit more about the progress?
Duncan?
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 then, which have been constructive. So it's really early, Michael, in some ways very early, customers have to be engaged or thereby. So we're not expecting to get more information really until a couple of months from now.
And we'll now take our last question from the queue from Farquhar Murray from Autonomous.
Just 2 questions, if I may. Firstly, on capital generation and remittances, you seem to have increased the capital generation target for year '21 by about EUR 0.6 billion versus where we were in December. And on the kind of cash flow remittance side, you seem to be basically talking towards the upper end of the cumulative range, which I think adds about EUR 0.3 billion. Can you possibly just explain whether there's something to that gap between the 2? Or is this kind of a bit more of a conversation for the end of the year? And then secondly, turning to the variable annuity actions and, in particular, the RBC and cash flow generation impact. Could you just clarify that those are based on end of 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 the closing at the end of the year?
So let me -- thank you very much, Farquhar. So let's start with Matt on the cap gen question and then Duncan after that, the VA question.
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 implementing the operational improvement plan, but also the macroeconomics have been favorable for us. So those are the tailwinds. The way 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 could say that we're perhaps late in the economic cycle, and we do want to be cautious about 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-19 pandemic.So we're not changing our guidance at this point in terms of remittances, only to say that we are now guiding towards the top end of that gross remittance guidance for the 2021 to 2023 guidance that we've done at the Capital Markets Day. So we had that at EUR 1.4 billion to EUR 1.6 billion. So now we're thinking more like EUR 1.6 billion. 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.
Thank you very much, Matt. So Duncan?
Farquhar, no, they're not 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-up rates from the buy-out program, which will in itself may be influenced by equity markets and interest rates. And then also the implementation of the dynamic hedges also the impact of that could be influenced by equity markets and interest rates, plus the fact that we put in a partial hedge several months ago as well, which is on rates that should apply some mitigation. However, we feel fairly confident that the -- as I have indicated in our presentation that the net of that is going to be no worse than 5 percentage points on the RBC ratio, barring really extreme market movement. So we feel pretty comfortable with that guidance.
Just as a follow-on, does that kind of extreme circumstances carried through to the capital generation indication as well?
The capital generation, the USD 50 million adjustment to the capital generation is mostly driven by -- it was driven by 2 things. One is a lower level of required capital being released because we're effectively transferring capital into reserves here. 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 5 percentage points, that should be fairly range bound. And the second impact is the impact of the hedge on the equity market from the DB book of business, where the operating capital generation we assume a equity market return, and we no longer capture that and so I don't think it's meaningfully impacted by market circumstance.
With this, I would like to hand the call back over to Lard Friese, Chief Executive Officer, for any additional or closing remarks.
Thank you, operator. This is Jan Willem. This concludes today's call. Thanks again for your continued interest in Aegon.