Aegon NV
AEX:AGN
Earnings Call Analysis
Q2-2023 Analysis
Aegon NV
Aegon has ventured into a new chapter of its transformation journey, freshly equipped with the latest IFRS 9 and 17 accounting standards. The insurer's strategic developments are noteworthy, consisting of a balance of divestitures and acquisitions aimed to sharpen focus. After selling their remaining businesses in Central and Eastern Europe and exiting their India joint venture, Aegon now concentrates on three main markets, three growth markets, and globally through their asset manager.
In financial terms, the first half of 2023 was marked by a 3% uptick in operating results compared to the prior year, against the backdrop of the new accounting standards. This was primarily fueled by performance uplifts across the U.S., U.K., and International segment. Asset Management, however, faced a dip due to lower management fees, despite trimmed operating expenses. Non-operating items struck a sour note, posting a €180 million loss, largely due to investment losses and impairments predominantly in the U.S. related to reinsurance and a reduction in short-term borrowings.
Aegon's operational engine has been running efficiently with a 13% surge in operating capital generation and a 26% leap in earnings on in-force. The capital foundation is proving to be thicker, foreshadowing the potential to meet the €1 billion operating capital generation ambition for 2023. U.S. RBC ratio's modest climb and Scottish Equitable's solvency dip highlight capital movements influenced by market trends and strategic initiatives. Moreover, the firm's ongoing actions in managing financial assets, particularly in Universal Life and Long-Term Care segments, demonstrate an unwavering commitment to bolster capital efficiency and uphold the integrity of their financial assets.
Aegon shows a staunch commitment to shareholder returns. Among the most notable moves is the expansion of the 2023 interim dividend to €0.14 per share, marking an ascent of over 25% from the previous year. This ascension is strategically aligned with the roadmap to achieve a dividend of around €0.4 per share by 2025. Cash has flown freely back to the shareholders' pockets with a completed €200 million share buyback program and additional €232 million distributed as the 2022 final dividend. It's an exhibition of faith not just in today's financial solidity but also in future prospects and plans.
The leadership is not resting on its laurels; executors of the Aegon strategy are already priming for the next critical milestone: migrating the company's legal seat to Bermuda. This isn't merely a change of address; it symbolizes a strategic maneuver designed to stabilize the structure, laying down the groundwork for relentless execution on their strategic narrative. Onwards, Aegon aims to fortify its investment, protection, and retirement solutions—a clear vision setting the tone for sustained growth and value generation.
You don't have any saved screeners yet
Good day, and thank you for standing by. Welcome to the Aegon First Half 2023 Results Call. [Operator Instructions] Please note that today's conference is being recorded.
I would now like to hand the conference over to your speaker, Hielke Hielkema, Investor Relations Officer. Please go ahead.
Thank you, operator, and good morning to everyone. Thank you for joining this conference call on Aegon's first half 2023 results. My name is Hielke Hielkema from Aegon Investor Relations team. With me today are Aegon's CEO, Lard Friese; and CFO, Matt Rider, who will take you through the highlights of the first half year, our financial results and the progress that we are making in the transformation of Aegon. After that, we will continue with a Q&A session.
Before we start, we would like to ask you to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. And on that note, I will now give the floor to Lard.
Thank you, Hielke, and good morning, everyone. We appreciate that you are joining us on today's call. Today, we present our results under the new IFRS 9 and 17 accounting standard for the first time. But first, let me run you through our strategic developments and commercial momentum. We have a lot to talk about.
So let's move to Slide #2 for the achievements in the first half of 2023. We have started the next chapter in Aegon's transformation delivering a successful Capital Markets Day in London in June. We closed the transaction with a.s.r. in July and have started the €1.5 billion share buyback program associated with the deal, which we expect to complete before the end of June 2024. In addition, we still intend to reduce our leverage by up to €700 million in the same time frame, and we'll update you on that when appropriate.
On the strategy front, we continue to take steps to transform our business. We have increased our financial stake in our Brazilian joint venture, we expanded our partnership with Nationwide Building Society in the U.K. and extended our asset management partnership with La Banque Postale in France. The sale of our remaining Central and Eastern European businesses have been closed, and we have announced the sale of our stake in our joint venture in India. We are now fully focused on 3 core markets, 3 growth markets and 1 global asset manager.
We're also delivering on our commitments to continue to reduce our exposure to U.S. Financial Assets and to improve the level and predictability of capital generation. Transamerica has been able to execute an additional reinsurance transaction, encompassing 14,000 Universal Life policies with secondary guarantees. This will free up approximately $225 million of capital, which will be used for management actions to further reduce our exposure to Financial Assets over time. It also significantly improves our risk profile, together with the prior similar reinsurance transaction, the total of 25% of the statutory reserves backing these policies have now been reinsured.
Turning to our results over the first half of 2023. The operating results now reported under the new accounting standards, IFRS 9 and 17, increased by 3% compared with the first half of 2022. This was driven by increases in the U.S., the U.K. and the International segment, which more than offset a decreasing operating result in Asset Management. Operating capital generation before holding, funding and operating expenses increased by 13% compared with the first half of 2022, reflecting business growth in our U.S.
Strategic Assets, together with improved claims experience. Turning to our commercial results. Transamerica performed well. We delivered strong sales growth in all of our U.S. Strategic Assets.
The U.K. Workplace Solutions platform continued to deliver strong growth and sales increased in our partnerships in China and Brazil. The results of our Asset Manager and our U.K. Retail business continued to be negatively affected by adverse market conditions. Recently, we have announced our intention to move Aegon's legal seat to Bermuda.
Subsequently, the Bermuda Monetary Authority will then assume the role of group supervisor. Today, we have convened 2 extraordinary general meetings to be held at the end of September to seek shareholder approval for the move.
Finally, on our path to increase the dividend to around €0.40 per share over the year 2025, we have increased the 2023 interim dividend to €0.14 per share, up more than 25% compared to the 2022 interim dividend. This is testament to our strong financial position and prospects. Before I move on to the results, I want to recap the priorities we presented at the recent Capital Markets Day in London on Slide #3. We have defined 4 key priorities to create value for our shareholders during the second chapter of Aegon's transformation. The first of the near-term priorities we announced in June has already been achieved.
We have closed the transaction with a.s.r., and we now own a nearly 30% strategic stake in the Dutch market leader. Moving our legal seat to Bermuda is the next step ahead of us on our journey to transform the group, and we are on track to accomplish this. We presented our plans to increase Transamerica's value and to capture the opportunities in the U.S. middle market. Our ambition is to build America's leading middle market life insurance and retirement company.
Over the coming 3 years, we will increase both the level and the quality of capital generation from Strategic Assets while reducing our exposure to Financial Assets. At the same time, we will continue to strengthen the U.K. and Asset Management businesses, and we will invest in growing the joint ventures we have in International and Asset Management. The final priority announced at our Capital Markets Day relates to our capital management. We will continue to be rational and disciplined allocators of capital looking to utilize our significant financial flexibility at the holding to create value for our shareholders.
With the strategic priorities clearly set, let's move on to our commercial momentum in the first half of 2023, starting on Slide #4. I would like to start with the progress made by World Financial Group or WFG, our vast life insurance distribution network, one of the two focus areas in our U.S. Individual Solutions business. Our ambition is to increase the number of WFG agents to 110,000 by 2027, but at the same time, improving agent productivity. Momentum remains strong with a number of licensed agents having grown to 70,000 by the end of June, an increase of 20% compared with a year earlier.
In addition to extending WFG's distribution reach, we are taking actions to improve the productivity of the agency sales force. The number of multi-ticket agents, these are agents selling more than 1 life policy over the last 12 months, has increased by 12% compared with the year earlier. Transamerica's market share of life insurance products sold by WFG in the U.S. remains high. This is due to the improvements we have made to the service experience for WFG agents, combined with the continued competitiveness of Transamerica's products in this distribution channel.
Slide #5 addresses the second focus area of our U.S. Individual Solutions business. We are investing in both product manufacturing capabilities and the operating model in order to position the Individual Life insurance business for further growth through WFG and third-party users. As you can see, commercial momentum remained strong in the first half of the new year. New Life sales increased by 17% compared with the first half of last year, largely driven by higher Indexed Universal Life sales within WFG.
In the first half of 2023, New Business Strain increased by 12% compared with the first half of 2022. And the Earnings On In-force increased 35%, reflecting the strong growth of this portfolio. So let's move to Slide #6, where we show the progress made in the U.S. Workplace Solutions retirement plans business. Transamerica aims to increase Earnings On In-force from its Retirement business by leveraging its capabilities as a record keeper with the ambition to materially increase the penetration of the ancillary products and services it offers.
Sales momentum remained strong in the first half of 2023. Net deposits for midsized plans increased 32% over the same period last year, benefiting from both strong written sales in previous periods and lower withdrawals. We also saw good growth of our General Account Stable Value products as well as Individual Retirement Accounts, in line with our strategy to grow and diversify our revenue streams with the Workplace Solutions segment. In the first half of 2023, the Earnings on in-force of our Strategic Assets in the Retirement Plans business were USD 45 million, which was an increase of 20%, mainly from the General Account Stable Value product.
Let's move to Slide #7, the United Kingdom. In the first half of 2023, net deposits in Workplace channel amounted to a record high of GBP 1.5 billion, an increase of 36% compared with the first half of last year. Sales momentum in Workplace remains strong. In the Retail channel, on the other hand, commercial results were weak. The macroeconomic environment continued to negatively impact investor sentiment across the industry.
As a result, net outflows amounted to GBP 1.1 billion in the first half of 2023, more than in the same period of 2022. Annualized revenues lost on net deposits amounted to GBP 6 million for the quarter. This was predominantly due to the gradual runoff of the traditional product portfolio, which was partially offset by revenues gained on net deposits in the Workplace channel. I'm now turning to Slide #8 to comment on the challenging performance of our Asset Management business. Market conditions remain challenging, which led to third-party net outflows in both Global Platform and Strategic Partnership segments.
Combined with adverse market movements and unfavorable currency movements, Assets Under Management declined by 7% compared with the end of June 2022. Encouragingly, we saw improvements in third-party net deposits towards the end of this half year. Operating capital generation declined compared with the first half of 2022. This was driven by lower net deposits and unfavorable market movements despite lower expenses. Let's move on to our growth markets on Slide #9, where we continue to see steady progress.
New Life sales in our growth markets increased by 45% compared with the first half of 2022. This was largely driven by our business in China following the relaxation of the country's COVID-19 measures. We also recorded good growth in Brazil. Non-life premium production in Spain and Portugal rose 6% as weaker demand for Property and Casualty Solutions was more than offset by growth in Accident and Health insurance. Operating capital generation of the International segment, excluding TOB, increased by 27% as a result of new business growth.
On Slide #10, you'll see that we maintain a high pace on the transformation of Aegon and sharpening of our strategic focus. The transaction with a.s.r. has been closed and disentanglement solutions are in place. As the new combination moves forward, we expect a significant synergy to be realized from which our shareholders will benefit. Aegon U.K. has extended their partnership with Nationwide Building Society and will onboard Nationwide's advisory business early next year. This supports Aegon's U.K. strategy to be the leading digital platform provider in the workplace and retail markets and to drive forward our pension and investment propositions. Aegon Asset Management and La Banque Postale have expanded their partnership in the asset manager La Banque Postale Asset Management through 2035. We have also participated in the capital raising to fund La Banque Postale Asset Management's acquisition of La Financière de l'Echiquier, a French asset manager.
The acquisition will consolidate La Banque Postale Asset Management's strong market position. In Brazil, we have increased our economic ownership stake in the life insurance joint venture, Mongeral Aegon Group from 54% to 59%. This puts us in a stronger position to benefit from the growth in that market. We also took significant steps in our strategy to exit subscale or niche positions. We have closed the sale of our remaining Central and Eastern European businesses, first announced in 2020 and have announced the sale of our stake in the India business.
The final topic I want to address on Slide #11, is the intended transfer of our legal seat to Bermuda. Bermuda Monetary Authority or the BMA is to assume the role as our group supervisor after this. Given the importance of this topic, I want to address the rationale behind this development. Following the closure of the transaction with a.s.r., Aegon no longer has a regulated insurance business in the Netherlands. And under EU Solvency II rules, Dutch Central Bank can no longer remain a group supervisor and a new group supervisor is required.
Various options were explored. Some options were, however, not feasible for various reasons. For instance, in some jurisdictions, does not have a meaningful business presence. In others, the financial reporting requirements do not align with our accounting framework or prevailing regulatory uncertainty would not provide a stable basis for the execution of our global strategy. After consulting the members of the college of supervisors, which consists of the different supervisors, which regulates our local entities, the BMA informed us that it would become Aegon's group supervisor if we were to transfer our legal seat to Bermuda.
Transferring the legal seat to Bermuda and being regulated at the group level by the BMA is consistent with our strategy outlined at the recent Capital Markets Day. Bermuda has an established well-regarded regulatory regime and has experience in regulating insurance groups and companies with an international presence. The regulatory regime has been granted equivalency status by both the EU and the U.K. and has been designated as a qualified and reciprocal jurisdiction by the U.S. National Association of Insurance Commissioners.
The transfer of the legal seat to Bermuda allows Aegon to maintain its headquarters in The Netherlands, where we have the experience and the talent to manage this international company. It also allows us to maintain our listings on Euronext Amsterdam and the New York Stock Exchange, bringing stability to our shareholders and to remain a Dutch tax resident. On Slide #12, this addresses the governance consequences of the intended transfer of our legal domicile. Following the transfer to Bermuda, Aegon N.V. will become Aegon Limited, a Bermudian company.
This means that the basis of Aegon's bylaws will be established on Bermudian law and governance practices. At the same time, we remain committed to applying well-recognized international governance standards. Aegon will preserve its current governance principles to the extent possible and practical in view of the redomiciliation and where appropriate to the context of Aegon's international footprint. This includes Aegon's commitment to take into account the long-term interest of the company and all its stakeholders. We conducted an extensive engagement process with our shareholders and other stakeholders following the initial announcement in June.
We have listened carefully to the feedback we received and made a couple of changes to the proposed bylaws on the basis of that dialogue. Aside from the other voluntary commitments through strict governance, we had already announced, we have added further binding rights for shareholders in terms of approval of major transactions and on the Board's remuneration policy. These changes and all other relevant information have been published on our corporate website today as part of the complication documents for the Extraordinary General Meetings during which investor approval for the transfer of the legal seat will be requested. I now hand over to Matt for the results of the first half of 2023. Matt, over to you.
Thank you, Lard, and good morning, everyone. Today, we are reporting our results under the new IFRS 17 and 9 accounting framework for the first time. It's been a huge endeavor over the past years to prepare for this shift. So I wanted to start off by thanking the many colleagues who are involved in this process. As you can see, we've provided a lot of new disclosure and it will likely take you some time to digest it and get comfortable with the new standard.
Implementing the new framework also in the context of the a.s.r. transaction, has met some changes to our processes. For example, we're reporting a week later than we did last year and now half yearly. Beginning with our full year 2023 results disclosure, our financial reporting calendar will move even later to accommodate, bringing in the results of a 30% shareholding in a.s.r. on an IFRS 17 basis.
We also will move our expense assumption review process to the fourth quarter for all business units in order to leverage our budgeting process. At this moment, we are not publishing IFRS 17-based sensitivities, but we will do so by the time we publish our 2023 annual accounts. So with that, I want to walk you through the overview of our financial results starting on Slide 14. The operating result increased by 3% compared with the first half of 2022. Increases in the U.S., the U.K. and the International segments were partially offset by a decrease in Asset Management. Operating capital generation before holding, funding and operating expenses increased by 13% compared with the first half of 2022. This was driven by the U.S. and reflects business growth of Strategic Assets and improved claims experience. Free cash flow in the first half of 2023 amounted to €287 million and mainly reflects remittances from the U.S., the U.K. and Aegon's asset management joint venture in China in the first quarter. Cash capital at the holding decreased to €1.3 billion at the end of June 2023 as planned, as remittances from the units were primarily offset by capital returns to shareholders. Our gross financial leverage was stable at €5.6 billion. The group Solvency II ratio decreased by 6 percentage points since year-end 2022 to 202% due to a number of items, including the deduction of the interim dividend, a reduction of eligible owned funds due to tiering restrictions, previously disclosed onetime items and unfavorable market movements. The latter notably includes the impact of lower real estate valuations in The Netherlands.
Nevertheless, our capital position remains strong and the capital ratios of our main units remained above their respective operating levels. Let's move on to the operating result on Slide 15. The group's operating result was €818 million, which is an increase of 3% compared to the prior year period. The operating result for the U.S. increased by 4% in the first half of 2023 or 3% in local currency terms.
This increase was driven by an improvement in mortality claims experience, but largely offset by a decrease in the net investment result, partly from higher interest expense on short-term variable rate borrowings. The noninsurance operating result benefited from growth in both Retirement Plan and WFG. Over the same period, the operating result from the United Kingdom increased by 24% in local currency. This was driven by an improvement of the net investment result as a result of favorable market movements, which more than offset the impact of the planned transfer of the protection business to Royal London. In our International segment, the operating result increased by 9%, predominantly due to our growing businesses in Spain and Portugal and Brazil.
Finally, the operating result from Aegon Asset Management decreased by 34% in constant currency terms compared with the same period of 2022. The decrease was driven by lower management fees in both global platforms and strategic partnerships and despite a lower operating expense, which included reduced variable remuneration accruals.
Slide 16 shows the net result over the first half year of 2023. Nonoperating items totaled a loss of €180 million, driven in equal parts by realized losses on investments and net impairments. Realized losses on investments were primarily recorded in the U.S. and stemmed from the sale of bonds in the context of the reinsurance, a part of this SGUL portfolio as well as to facilitate a reduction of short-term borrowings. Net impairments were driven by an increase of the expected credit loss balance in the U.S. due to an update of economic forecasts. Other charges amounted to €870 million. In the U.S., other charges amounted to €574 million. These were driven by investments in the Life operating model and the restructuring of an earn-out agreement with the founding WFG [indiscernible]. It also included the impact of model and assumption updates in the U.S.
These impacts were in line with what we had indicated at the recent Capital Markets Day. Other charges also included a €110 million charge related to the first half of 2023 results of Aegon The Netherlands, which was driven by an impairment as a result of the reclassification of these activities as held for sale. Another €110 million charge relates to a book loss on the remaining activities in Central and Eastern Europe following the completion of their disposal. I will now turn to Slide 17 to address the development of Aegon's Contractual Service Margin, or CSM, in the first half of the year 2023. New business CSM creation amounted to €0.2 billion, mainly driven by growth of the Individual Life portfolio in the U.S., partly offset by the reinsurance of the U.K. protection book. The CSM release of €0.5 billion was mainly driven by the runoff of the Financial Assets in the U.S. and of the traditional book in the U.K. Negative claims and policyholder experience variance was driven by unfavorable experience in Individual Life and unfavorable lapse and utilization experience in variable annuities, both in the U.S. The main driver for the decrease of the CSM in the U.S. was the impact from assumption changes in the Americas, as was previously announced. This includes the removal of the morbidity improvement assumption and an increase in inflation assumptions in Long-Term Care, partly offset by the benefit of the expected premium rate increase program. In addition, the impact of investments we will make into a more customer-focused operating model for Life was reflected in the assumptions and reduced the CSM. Markets had a favorable impact on the CSM for products accounted for under the variable fee approach primarily variable annuities in the United States. At the end of the first half of the year 2023, the CSM stood at €8.3 billion.
Let me now turn our view on capital on Slide 18. Operating capital generation before holding, funding and operating expenses increased by 13% compared with the first half of 2022. Earnings on In-force before holding expenses increased by 26% compared with the prior year period. Greece was driven by Transamerica and reflects improved claims experience and growth of our Strategic Assets. The increase in Earnings on In-force was partly offset by higher new business stream compared with the last year, mainly from growth in the U.S. This is in line with our ambition to drive profitable growth in our U.S. Strategic Assets. The release of required capital was broadly stable compared with the first half of 2022. In conclusion, we remain well on track to meet our guidance of at least €1 billion operating capital generation from the units in 2023. On Slide 19, I want to walk you through the development of the capital ratios of our main operating units.
Compared with year-end 2022, the U.S. RBC ratio increased slightly to 427% above the operating level of 400%. Operating capital generation contributed favorably to the ratio, more than offsetting remittances to the holding. Market movements had a marginally positive impact with benefits from favorable equity markets being largely offset by fund basis risk.
Onetime items had a negative impact. These were driven by the investments made in Strategic Assets and the annual model and assumption updates, which reduced the RBC ratio by 13 percentage points. We guided at the Capital Markets Day for a negative impact of in total around 20 percentage points on U.S. RBC ratio. We, therefore, expect to reflect the remaining negative impact of around 7 percentage points in the RBC ratio in the second half of this year.
The impact of credit impairments and rating migrations on the RBC ratio remained negligible in the first half of the year. The solvency ratio of Scottish Equitable, our main legal entity in the U.K. decreased by 3 percentage points to 166%. This reflects the negative impact from market movements and remittance to the U.K. intermediate holding.
This remittance was subsequently used in part to fund the acquisition of Nationwide's advisory business.
Let me now turn the page for an update on our Financial Assets on Slide 20. Here, we summarize the continued value creation from our Financial Assets. In July, we reinsured 14,000 Universal Life policies with secondary guarantees, also known as SGUL policies, through a reinsurance transaction, reducing exposure to mortality risk. This has freed up $225 million of capital, which we will use to further reduce our exposure to Financial Assets, in line with our plan to expedite the runoff of these exposures. The benefit of the reinsurance will be recognized in 3Q 2023.
Together with the prior reinsurance transaction undertaken, a total of 25% of the statutory reserves backing the SGUL portfolio has now been reinsured. In Long-Term Care, our primary management actions are rate increase programs. Since the start of the year, we have obtained regulatory approvals for additional rate increases worth USD 86 million. This represents 12% of the new target of $700 million worth of premium rate increases that we had announced at the Capital Markets Day. We will continue to work with state regulators to get pending and future actuarially justified rate increases approved.
In the first half of 2023, we extended our track record of successfully hedging the targeted risks embedded in our variable annuity guarantees, achieving 98% hedge effectiveness. The capital employed in our Financial Assets was stable compared to the end of 2022 at $4.1 billion.
During the first half of 2023, releases were realized on the Universal Life and fixed annuity blocks. These were offset by increases in required capital on variable annuities and the higher allocation of alternative assets to the LTC block. On Slide 21, you can see that cash capital at the Holding decreased to €1.3 billion during the period, which is still in the upper half of the operating range. Free cash flow for the period was in part offset by the impacts of the divestitures and acquisitions Lard talked about earlier.
Cash outflows in the first half of 2023 were mostly related to capital returns to shareholders. We completed the €200 million share buyback program and returned a further €232 million to shareholders through the 2022 final dividend. Let me now turn the page for my concluding slide. In summary, we continue to deliver on our plans and the results over the first half of 2023 show that we continue to make good progress and that we are on track to achieve our 2025 financial targets. And with that final note, I now pass it back to you, Lars, for your concluding remarks.
Thank you, Matt. Let me summarize today's presentation with the final Slide #24. Aegon has entered the next chapter of its transformation from a position of strength. We have concrete ambitions and plans to move forward with our strategy as we presented at the Capital Markets Day in June. Operating capital generation growth was strong in the first half of 2023.
Commercial momentum remained strong in our U.S. Strategic Assets, in our U.K. Workplace activities and in our International growth markets. More work needs to be done on Asset Management and our U.K. Retail business.
We will address our ambitions here with you in 2024. The next important milestone will be the Extraordinary General Meetings in September to receive shareholder approval for the transfer of our legal seat to Bermuda. We are convinced that the proposed move is in the interest of shareholders and provide stability for the group to continue to execute upon its announced strategy. If you have any questions on this process, we have published detailed documents on our corporate website. Feel free to reach out to the IR team if any questions remain.
I want to be clear that the redomiciliation process will not distract us from what is most important: accelerating the execution of our strategy, driving growth and creating value by reallocating capital from Financial Assets to Strategic Assets. Let me conclude by reiterating my confidence that we will deliver on our strategic commitments and financial targets. We are committed to become a leader in investment, protection and retirement solutions, and we have a clearly articulated strategy to achieve this.
I would now like to open the call for your questions. [Operator Instructions] Operator, please open the Q&A session.
Thank you. [Operator Instructions] We will now go to our first question. And your first question comes from the line of Andrew Baker from Citi.
So the first one is on the OCG. Are you Just able to provide moving pieces on the OCG versus the previous €270 million quarterly guidance and what we see the normalized run rate going forward? And I guess within this, can you just talk a little bit about the New Business Strain because my understanding from CMD was that this was expected to grow over time? It looks like 2Q specifically, it declined €20 million or so. So how should we be thinking about this going forward?
And then secondly, just on the CSM growth. I look at the new business and interest accretion, this looks lower than the CSM release in the first half. So I appreciate some of this is driven by mix between Strategic and Financial Assets. So just wondering if you are able to provide a sense of the sort of normalized CSM growth expectations for the Strategic Assets versus the Financial Assets going forward? I'm just really trying to get a better picture of how you're positioning the growth story against sort of the CSM that's declining from the Financial Assets drag going forward?
Thank you much, Andrew. Matt, over to you.
Thanks for your questions, Andrew. I can pick up the OCG one, first. So the bottom line, I will just tell you, the guidance that we had provided for last quarter of around €270 million OCG per quarter is still the same guidance, and I can walk you through the moving pieces. So in the -- in the second quarter, we reported €328 million of operating capital generation. But within that, we had some very favorable claims experience, €35 million worth, vast majority of which is coming from mortality claims experience in the U.S.
We also had that lower New Business Strain of about €10 million that I'll come back on in 1 minute. And then we also had about €10 million of favorable underwriting variances in the U.K. So if you do the sums, then you'll come to a -- what we think of as a clean run rate for the quarter of €273 million, which is pretty much spot on with the guidance that we gave for the first quarter. Now for your second question, you clearly noted the reduction in the New Business Strain, although it's actually coming from the Retirement Plans business. So we're still seeing continued growth in New Business Strain from life insurance, which is where we want to see it because we're issuing profitable new business there.
But in the Retirement Plans business, you may have seen that we had like quite a large net deposit number in the first quarter, and it was lower in the second quarter, and we hold capital against that. So that's the reason for the lower New Business Strain. On the -- let's go through the CSM interaction here a little bit. And I want to call out -- and we'll do it at a group basis, but it's largely the same, by the way, in the U.S., the same kind of explanations. What we did at the group level is we added a CSM for new business of about €194 million, and we had a corresponding CSM release of €483 million.
So what we're seeing is that the new business CSM that we're putting on is lower than the release that we're getting on the CSM on the in-force block. The biggest driver of that is the fact that the CSM that we actually have, vast majority of it is related to the Financial Assets. And these are closed block assets that are going to run off over time. So just to give you an idea, so we have about, let's say, in the U.S., about a little bit over €7.1 billion of CSM. Of that, 72% of it is sitting in the Financial Assets and only the balance is sitting in the Strategic Assets.
And if you look at the CSM release for the second half of the year, more than 80% of that was driven by the Financial Assets portfolio. And again, this is running off. So what you're going to see over time is the CSM release is going to get lower and lower as those Financial Assets roll off. But here's the important thing, when you think about the way that we generate earnings, and we've talked about this quite a lot at the Capital Markets Day, is we would expect to see a pickup in the earnings that are generated from businesses that are not accounted for under IFRS 17. So here, we talk about the growth in WFG.
We talk about the growth in, for example, the U.K. platform sales, which as of 2020 are really not accounted for under IFRS -- or not accounted for as insurance contracts, asset management, retirement plans in the U.S., ex the Stable Value funds and that sort of thing. So you're going to see this little tipping point where you got a reduction in the insurance results, and you're going to see increases in the results for noninsurance. And I think that reflects pretty well what we talked about at the Capital Markets Day with respect to the Earnings On In-force development over time.
We will now go to the next question. And your next question comes from the line of Michael Huttner from Berenberg.
I wanted to ask on the U.S. claims experience. Both of you can maybe split the mortality in the Long-Term Care. And you just said you didn't expect the mortality to remain this strong. So I just wondered if you can give some more granularity around that.
So the numbers are -- I was thinking the numbers are lovely, but you, obviously, saying a lot going to carry on. And then the other question is, you did that Universal Life buyout program. Can you talk a little bit more about that? I remember it was a topic a little bit because I think you started it on the day of the Capital Markets Day or about then. And I was getting quite excited because you did similar programs in the variable annuities business.
But I just wondered if it's done now and what more can be done -- just to get a bit more granularity around this.
Thank you very much, Michael. This is Lard. Just to clarify your second piece, is this also pertaining to what we disclosed today about the reinsurance transaction, the with secondary guarantees?
Yes, please.
Okay. So thank you very much. So on both questions, Matt, can I hand over to you?
Thanks, Michael. Yes. So on the first one on mortality, we have to look at it slightly differently between the way that it's reflected in operating capital generation and the way that it's reflected in the results for IFRS. But I think it's easiest to do it on the operating capital generation side. So we had a -- relative to our long-term expectations, we had about €34 million in the better claims experience on the mortality side and €1 million, so as I said before -- on the morbidity side.
So as I said before, we had good claims experience, but the vast majority of it is sitting in the mortality result. One thing that you may want to think a little bit about when we report under IFRS 17, the way that we reflect mortality experience is somewhat different than the way that we had reflected it before. And here, we look at straight up basically the cash difference between our actual and our expected mortality based on our long-term management best estimate. And what you see in the first half of 2023, that it was basically €30 million worse than our long-term management best estimate expectations, which is actually not a lot given the size of the -- not a lot given the size of the book.
One thing I would note -- or I would mention is that we did quite some assumption updates in the -- for the first half of the year. So what's going to happen now is we do our assumption updates as the last step in the process. We actually did some things from mortality, which would make our expectation worse. So what you're going to see in that experience variance number is that, that should be reduced now that we did our assumption update. You can contact our dear colleagues here in HR -- or in IR for a tutorial on how this works, I think, at a later moment.
Now with respect to your second question, I think you're referring to the buyout of institutionally-owned contracts rather than the SGUL. So we have continued that program. This is something that we had started at the beginning of last year. We have added to it. And at this point, I think the [indiscernible] business, we've taken out pretty -- 15% of the face value that's associated with these policies that are owned by institutional investors.
We are generally making an investment return of greater than 10%. That's what we price for, and that's what we monitor.
But going forward, we intend to do more of this, but we do want to take a measured approach because we do want to be able to meet our pricing hurdles on this. So we'll do it as we go on. And as I said in my opening remarks, we're going to use some of the capital that has been released from that SGUL reinsurance deal to be able to whittle down these Financial Assets, including the institutionally-owned SGUL contracts even further.
And you can say a little about the SGUL as well?
Yes, I can talk about the SGUL deal. So -- I mean just let's frame it a little bit. So what we're talking about here is reinsurance of 14,000 policies representing about €1.4 billion of reserves. And I think as Lard has said in his opening remarks, that represents about 25%. So all the SGUL reinsurance we've done to date represents about 25% of the U.S. statutory reserves related to the block. Just to put it in perspective, it's also about 30% of the net amount of risk. So think of it as the face amount. So this transaction generates €225 million of capital and it's basically going to reduce the RBC required capital by about €50 million. Now importantly, it's also going to improve operating capital generation going forward because this block had a drag as the contracts get older and reserves increased, there was an OCG drag.
So we'll get to see a benefit of about $25 million per year. But I got to tell you, that's all embedded in the Capital Markets Day expectations. We had baked all that in, but I just want to give you a framing for what that SGUL reinsurance deal does for us.
We will now go to our next question. And your next question comes from the line of David Barma, Bank of America.
Just to come back on what you just said about the OCG benefits from the reinsurance deal that you've announced today. So is that part of the €0.1 billion of additional OCG that you flagged at the CMD?
Yes, it is. Yes.
It is, okay. Okay. And then secondly, on the U.K., can you please talk a bit about the rationale for your recent extended partnership with Nationwide. And should we see this more as a retention tool for your existing book? Or is it part of a bigger strategy to increase advice, I take on U.K.?
Yes. Thanks, David. Yes, we're very pleased with -- I mean, your first question was answered by Matt, right? The answer was yes.
So on the extension of the partnership with Nationwide Building Society, we're actually quite pleased with that. We have always been, for a very long time, the partner of Nationwide when it comes to their customers since 2016, right? We've been doing that for 2016. And what we did is basically provide access to our products advised by Nationwide's in-house financial planning service.
Now this extended strategic partnership will continue, of course, will continue to be the provider of choice for the customers of Nationwide where it pertains to the ISAs and the general investment account. The providers will be the -- the provider will continue to be the provider of choice. But we're moving across the advisory teams from Nationwide Building Society. We moved that across to our side, which is actually playing to the strength of both partners even better. So this is really something that sets up and extends the partnership into the future, and therefore, it's something that we're very pleased that we were able to do.
And your next question comes from the line of Farquhar Murray from Autonomous.
Just 2 questions, if I may. Firstly, on the CSM roll forward on Slide 17. Please, could you just elaborate on the policyholder experience in the VA book. You mentioned lapse in utilization. But I just wonder if you can give us a little bit more color on which products are driving that in a sense of what's behind it and how it might develop?
And then secondly, momentum in WFG looks solid in terms of license agents, but the multi-ticket one is slightly lagging that improvement. Can I just ask how long it is taking for a typically newly licensed agent to follow through into a multi-ticket one? And what kind of initiatives can you do to encourage conversion there?
Farquhar, I'm going to take your WFG question, and Matt will take the CSM roll forward. On WFG, yes, so we are in a -- we have said that we want to do a couple of things. We want to grow our agents to the 110,000 target by 2027, and we're well underway to get there. You noticed quite a nice increase year-on-year for that. And we also want to grow overall tickets and productivity of the agents.
It depends a little bit on -- there's not 1 single rule for this on how long it takes from -- to move from a single ticket to multiple ticket agent. It takes time. I have to get back to you on how much time that exactly takes. But it's something that, that is not, let's say -- it requires a very targeted approach to make sure that the agents become more and more productive over time.
We have seen this productivity improvement. We are measuring it, and we're reporting on it. So you can continue to see the progress in the near future. On the CSM?
Yes. So I'm looking at Slide 17, where you directed me and just to level set everybody, we see the minus €163 million and the CSM balance and on the right to see that it's related to U.S. Variable Annuities and Individual Life. It is generally related to on variable annuities. It's poor surrender experience and benefit utilization experience.
And on the Life side, there is a little bit of a mixed bag of persistency and mortality in there. One thing to note is that I think we're all going to have to get used a bit to the geography of these things. So for example, on the variable annuity side, you have these experienced variances that are hitting the CSM, and that's in contracts that have CSM, which is mainly withdrawal benefits historically written -- withdrawal benefits rather than like the IB and DB business that we have, which doesn't have a CSM. So you see experience variances there going through the P&L rather than CSM. But if you call in IR, we can give you a little bit more detail on that one.
We will now go to the next question. And your next question comes from the line of Iain Pearce from Exane.
Just a couple on the CSM. Firstly, thinking about the CSM walk, I'm guessing you expect that the size of the decline on a normalized basis to be slowing. The expectation is that new business will be growing in its contribution towards CSM and the release of the CSM to shrink as the 80% in runoff declines. I'm just wondering on the sort of time frame of how long you expect that CSM to be declining for and if you expect a gradual switch over of new business becoming bigger than the runoff of the CSM? And if there's any sort time frame for what that might look like?
And then the second one was just on the assumption changes that are made in CSM, flagging some deteriorating assumptions in Long-Term Care. Just wondering if this means that sort of profitability has declined in the Long-Term Care business? So I guess that would be quite surprising given the sort of rate creates that you've been putting through there and the sort of favorable morbidity experience that you've been having recently. So just those 2 questions [indiscernible], please.
Yes. Thank you, Iain. So, Matt, over to you.
Yes. It's hard to give a bit of a time frame on the -- on where we're going to get a crossover point where we get the new business added in CSM to cross the release of the release of the CSM, but it's certainly not in the short term or the medium term. The way to think about CSM release and just to kind of stick it in your models when you're starting to model this stuff, it's really -- what we're looking at is somewhere between 8% to 12% of the beginning balance of the CSM to be released every year and you can kind of walk that down. But I know it's not a perfect answer for now, and we'll come back with something a bit later on that one.
With respect to the assumption changes on Long-Term Care, let's recognize what we're actually doing here. So you have it exactly right that in the CSM roll forward, you're seeing a big reduction in CSM as a consequence of the -- removing the morbidity assumption and increasing the inflation assumption. And that is only partially offset by the increase in the CSM as a consequence of the premium rate increase program that we're putting in.
Now profitability, here's the thing. Had we not removed that morbidity improvement assumption, we could have, if we don't see morbidity improvement coming through, we would have seen a drag in that experience line for the block. Yes, you are right, we've had good experience for it in the past, and it's -- we expect that to continue in the future. But right now, by removing that morbidity improvement assumption to the extent that morbidity improvement actually improves, we're going to see that as good guys in the experience adjustment going forward.
It's also -- and it's difficult to connect these 2, but you can imagine that we always do actuarially justified premium rate increases and part of that actuarial justification is the fact that we have removed the morbidity improvement assumption and increase the inflation. So what we would expect to see in our experience results going forward, if anything, it's going to be good guys rather than the possibility that future bad guys occur, if that kind of makes sense.
We will now go to the next question. And your next question comes from the line of Nasib Ahmed from UBS.
The first one on ULSG, generally. So you clearly have a drag. You've got €25 million on the block that you've reinsured. Is there anything you can do on the assumptions there similar to down on the Long-Term Care morbidity on persistency or mortality to make sure that, that drag is zero and take a hit on the stock of RBC ratio? That's the question one.
And the second one is on the capital release from the reinsurance transaction. That's only €50 million of the €4.1 billion. I think you mentioned a few actions at the CMD that you could take to unlock further up to €4.1 billion. Are there any more actions that you're considering anything to update on versus the CMD?
So, Matt?
Yes. So the short answer is that there are additional management actions that we can do, either unilateral or bilateral actions as we said at the CMD. We also consider the potential for additional third-party transactions, but we're not going to comment on those at this moment in time. One of the questions that we sometimes get is we've now got approximately 25% of the stat reserves that are -- that have been part of reinsurance deals in the past. The question is, well, why don't you do another one?
Well, we can do those. But we try to attack the blocks bit by bit. Every cohort, every issue year can be slightly different in terms of the character. So we were going to whittle away at this over time. I would not expect 1 giant reinsurance transaction.
We've been successful in the past, and we expect to do that going forward to attack these blocks 1 bit at a time. But this last SGUL reinsurance deal was a very, very good one for us.
We will now go to the next question. And your next question comes from the line of Ashik Musaddi from Morgan Stanley.
Just a few questions I have. First of all on -- a bit of clarity on this reinsurance transaction. So how do we think about this ERU 225 million? Is this just like a €50 million release capital x4, which is ultimately freeing up the own funds that can be used? Or is it €50 million is the own funds released basically because of the SCR reduction and then on top of that, you have generated €200 million?
That's the first one, a bit of clarification. Second one is, if I look at the U.S. holding company, there was a 20% drag in first quarter from the RBC calibration to the holding company calibration, but now that's 28%. So what is that 8% extra? And how does -- how should we view that?
I mean does it matter from a capital perspective or we should just ignore what's going on in the U.S. holding company? Or do you need to fill it back if you have used it up something in that bucket? So that's the second one. Third one is, I mean, the CSM, I mean, how do we think about the CSM?
Do we need to care about the CSM because see if we need to care about this, then there is a bit of a concern because if CSM is going down this fast, I mean if I look at first half, your CSM balance went down by 10%. And if we use 8% to 12%, whatever 10% release of CSM, then the CSM release, which is ultimately earnings, earnings are coming down by 10% every year for the next many, many years to come. That will be offset by your noninsurance business, WFG and Retirement, but probably that's not as big as the decline in CSM. So do we need to care about the CSM and these one-off items. There are so many negative one-offs.
Do we need to care about those as well? Any visibility whether there are more in the future as you keep restructuring the book or -- that's 1 question I have is, how do you think of the CSM? Sorry, it's a bit broad question...
No, that's okay. So these were your questions, Ashik. Then I hand over to Matt.
Okay. Let's first break down the -- so the reinsurance transaction, we'll break down the €225 million for you. So basically, on a U.S. statutory basis, we have a gain on the transaction. We had a gain on the transaction.
That amounts to about €355 million. We also had to -- because we had to transfer assets to the reinsurer, we took losses on bonds in order to be able to fund the transfer of assets and the losses on bonds were about €180 million. And then the balancing item here would be the release of the RBC required capital of €50 million. So hopefully, that answers your question. The second one related to the U.S. holding company, and I think you pointed out that in the, let's say, the normal conversion of our RBC ratio to our group Solvency II ratio, we had a few differences because there are some things that are happening, again, outside of the regulated entities, but they are happening in the holding company. So there are a couple in there.
You may recall -- the first one is you may recall in the -- at the Capital Markets Day, we signaled that there was a -- that we were going to restructure an earn-out agreement with one of these WFG founding agents. And that -- so that has an impact on the holding company, which would not have been reflected in the RBC ratio. If you combine that with a couple other ones, there was also an impairment of -- I think it was a software asset that was sitting on the balance sheet at the holding company, and that was related to the project to bring in the TCS -- previously outsourced business into us. And then there was a contribution to the employee pension scheme, which happens outside, again, of the regulated entities. And if you add those up, you get to about 3 percentage points.
The other one that I kind of flagged in my opening remarks, relates to tiering limits on the Solvency II reporting. So in this case, we were -- we had more of a restriction on DTAs at a group level, and it really relates to the fact that we had a little bit higher DTAs in the U.S. And because of the transaction with a.s.r., there was a tax settlement part of that, which reduced deferred tax liabilities. So we don't get that offset. And as a consequence of it, you got that, let's say, breakage I think, in the Solvency II ratio.
And then finally, we had that deal with La Banque Postale, that we actually closed after the end of the quarter, but we did reflect that -- there is actually capital implications for that -- required capital implications to the tune of about 2%. So in general, so should you care about the U.S. holding company? Yes. The U.S.
holding company will come back to sort of normal by the end of the year as we work through some of these, let's say, the timing of funding for the WFG earnout as well as a couple of other little bits for the -- for that TCS in-sourcing. So it should not be an issue. By year-end, we'll have it straight. The last one was a very general assumption about CSM. So I want to -- so I'll talk in general about that.
CSM, you should care about. CSM is a -- you can think of it as a store of value. You can think of it in some manner as a present value of future profits. And over time, we will release that CSM into earnings. So that's actually the biggest driver of the insurance operating result.
So it is something to care about.
One thing that I would call out, though, is that during the course of the first half year, we had quite some big adjustments, frankly, with the assumption updates. Only a part of that hits the P&L, but some of it hits the CSM. So you'll see a reconciling item there that talks about nonfinancial assumption changes. And in euro, it was more than €550 million for the first half of the year. I don't think we're going to be making any further changes to morbidity improvement assumptions in the U.S. because we've eliminated it entirely. So I wouldn't imagine that there would be giant changes in this going forward.
But what you are going to see is that CSM is going to be released because so much of it is associated with the Financial Assets, but that takes actually quite a long time for it to release. I mean the duration of the long-term turnover is something like more than 14 years. So it's a long time. Most importantly, though, is the fact that although that's -- I'm describing the insurance side of the business. And there, we are going to get the benefit from a new business that we're getting on the life insurance side.
You see that come. And -- so you see that one come. But also the noninsurance parts of the business are going to be growing.
And as we always say, the whole point of the Financial Assets, we are trying to improve the quality of that earnings generation over time. And this is another -- by the way, this is another example of it. By removing that morbidity assumption, we are going to report better operating results in that line of business over time. And most importantly, it allows us to go after premium rate increases, which is real cash, real money that we don't get if we don't change that assumption.
That's very clear. Just 1 follow-up. Is there any RBC benefit from this reinsurance transaction that we should care about?
RBC benefit, well, it's -- you will see the onetime capital implication coming through the results. But the important thing is here is that there'll be a benefit on the SGUL reinsurance but then we intend to use some of that in the purchase of institutionally-owned Universal Life contracts. So I would not put a plus in the column for RBC ratio.
Perfect. That was very detailed and clear.
We will now go to our last question for today. And the last question for today comes from the line of Michele Ballatore from KBW.
Yes. The first question is about the growth in U.S. Individual Life, which, of course, was strong. I mean, what kind of -- how should we think about the development in profitability from this growth? I'm talking specifically about capital generation.
And the second question is about the Asset Management. Obviously, not a great half year, but I mean what is the outlook there? Or what kind of actions you're taking? And in general, what is the outlook for this segment specifically?
Yes, Michele, thank you very much. I'm going to talk a bit about the Asset Management business, and then I'll hand over to you on the profitability of the Individual Life segment to Matt, in the sales, there. On Asset Management. If you look at the half year, Asset Management is confronted with a number of reality that it needs to adapt to, right? I mean, over the last -- if you look at the year-on-year, we've seen, of course, quite an increase in rates, which have a large portfolio of fixed income investments that are your assets under management, you're obviously going to have an impact for the -- in the fees that you're generating.
But also noticing, as I said opening remarks in China, given the, let's say, wobbly economic environment in China and the investor sentiment, which is not very conducive that we saw on the third-party business there of €60 million outflows. And so it's partly the environment, but that's a reality. So we got to adapt to it, right? So we adapt to it in 2 ways. First of all, we are reducing expenses.
We are seeing that coming through already in the first half year. Did not, of course, completely offset the loss in revenues, but we continue to drive more expense reductions and we have plans for that, which we are currently executing. It's underway. It's already visible in the first half year. But you will see more of that coming through in the future.
That's number one. The second piece of adaptation has to do with the focus that we have on those investment strategies that we believe are the strategies that we have a competitive edge and can compete successfully in the future. And those are alternatives fixed income strategies, real asset strategies, the CLOs, et cetera. And we're not only focusing on that in our sales efforts in getting new mandates in, but also, we actually have acquired a CLO platform, a CLO team to strengthen our CLO platform. We have expanded in the LBPAM, so La Banque Postale Asset Management business to also strengthen the capabilities there, and we will continue to do so.
So it's adapting to a new reality, expense reductions and efficiency and focusing on those strategies that have -- that we have a competitive edge in, and increasing those capabilities and that attracts usually higher basis points over the assets managed. Matt, Individual Life.
So first, let's talk about the manufacturing side of this, which is I think where the question is really coming from. So what you've seen is, as Lard has said in his remarks, we have seen good growth in Individual Life sales in the U.S. We like that. We are seeing consistently increasing New Business Strain, which we also like.
Why do we like that? Because we've been able to maintain price IRRs of greater than 12% on the overall Life book. So this is a business that is extremely profitable. We like to write a lot of it. We're doing more and more of it at younger ages.
So this is extremely good business and it's -- so that one goes extremely well. The other one that I always mention is that the manufacturing is one side of the business. We also have the WFG as a distribution channel within the U.S. So capital generation and WFG is through really just distribution type earnings, which are also increasing in line with sales and even a little bit of a leverage effect there. So -- and on the Life side in the U.S., we are making some very good progress, able to maintain our pricing margins and you see things go generally in the right direction.
Thank you. This concludes the Q&A session. I would now like to hand the call back over to Hielke Hielkema for closing remarks.
Thank you, operator. This concludes today's Q&A session. On behalf of Lard and Matt, I want to thank you for the interaction. If you have any remaining questions, please do get in touch with us in Investor Relations. Thanks again for your participation in today's call, and have a good day.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.