© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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 Third 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, operator. Good morning, everyone, and thank you for joining this conference call on Aegon's third quarter 2021 results. We would appreciate it if you could take a moment to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. With me today are Aegon's CEO, Lard Friese; and CFO, Matt Rider, who will take you through the key points for this quarter. Let me now hand over to Lard.
Thank you, Jan Willem, and good morning, everyone. We appreciate that you are joining us on today's call, and we look forward to updating you on our third quarter results. In my part of the presentation, I will take you through the strategic highlights and through the progress we have made on our strategic assets. Matt Rider will then go through the details of the results and our capital position. He will also summarize the actions we have taken to further strengthen our balance sheet and to manage the financial assets. Finally, I will conclude the presentation with a wrap-up, after which we will open the call for questions and answers. So let's move to Slide #2. In the third quarter of 2021, we continued to drive our transformation forward by delivering on our financial and strategic commitments, and I am encouraged to see this reflected in our results. These results are supported by the benefit from expense savings initiatives, and we remain on track to deliver on the 3-year target of EUR 400 million expense savings. In our strategic assets and growth markets, we are benefiting from the growth initiatives that we have implemented, and our asset managed business extended its track record of over 9 years of positive third-party net deposits. We saw an improvement in performance across most of our businesses. This was offset by adverse claims experience in the U.S., with COVID-19 and a higher average claim size being the most important drivers. As a consequence, the operating result decreased by 16%. We expect the impact from COVID-19 to abate over time. In addition, we want to reduce the volatility and mortality experience in the U.S. and are looking at management actions to mitigate this. In the third quarter, we remain proactive in managing our financial assets. We launched the lump sum buyout program for certain variable annuity policyholders, which was well received by customers. Moreover, the guarantees on the remaining variable annuity portfolio are now being fully hedged against equity and interest rate risk. Furthermore, we have almost fully executed our planned management actions to reduce interest rate risk in the U.S., which has led to a significant reduction in our interest rate exposure. In our long-term care business, we have already achieved approval for more than USD 300 million worth of rate increases. And consequently, we have increased our expectations for the rate increase program to USD 450 million. This underscores our track record of actively managing this business. Our balance sheet remains strong and in line with our disciplined capital management framework. The capital ratios of all 3 main units are above their respective operating levels, and our group Solvency II ratio increased to 209%. We've also strengthened Aegon's approach towards corporate sustainability. Last week, we announced Aegon's group-wide commitment to transitioning our general account investment portfolio to net zero greenhouse gas emissions by 2050 with an intermediate goal set for 2025. This further underpins our concrete action plans to create lasting value for all our stakeholders. Lastly, we continue to work together with the Vienna Insurance Group to close the divestment of our businesses in Central and Eastern Europe. VIG is continuing its constructive dialogue with the Hungarian Ministry of Finance to clarify possibilities for a positive conclusion of the acquisition. Let me now give you an overview of where we stand with the execution of our operating plan on Slide #3. Our ambitious plan that now comprises more than 1,200 detailed initiatives is designed to improve our operating performance. We are continuously adding new initiatives to this plan to make up for any delays in existing initiatives and to capture the full potential of our organization. In the third quarter, we completed another 150 initiatives. More than 680 initiatives have now been fully implemented and are contributing to the operating results over time. Expense savings initiatives have so far delivered EUR 248 million of savings. So we remain on track to deliver on the EUR 400 million expense reduction target in 2023. Initiatives aimed at improving customer service, enhancing user experience and launching new innovative products are also well underway. These growth initiatives contributed EUR 29 million to the operating result this quarter. We intend to continue executing the expense and growth initiatives at pace. Let's now 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 the U.S. Individual Solutions business, we have the ambition to regain our top 5 position in selected life products over the coming years. In the third quarter, new life sales improved by 13% mainly driven by indexed universal life and whole life final expense products. Sales are benefiting from a 24% increase in licensed agents at World Financial Group and from a funeral planning benefit for eligible index universal life policyholders. Whole Life final expense sales increased following enhancements made both to the product and the application process. In the U.S. retirement business, Transamerica aims to compete as a top 5 player in the new middle market sales. This business continued to build momentum with the fifth consecutive quarter of written sales of over USD 1 billion and the third consecutive quarter of positive net deposits. So let's turn to our Dutch strategic assets on Slide #5. We are market leaders in both mortgage origination and new style defined contribution pensions, and we saw continued commercial momentum in these businesses in the third quarter. Mortgage sales amounted to EUR 2.7 billion as we benefit from our strong origination capabilities. About 2/3 of thereof consisted of fee-based mortgages originated for third-party investors through our Dutch mortgage funds. In our Workplace business, we saw a 6% increase in net deposits for new style defined contribution products. Assets under management for this business increased to EUR 5.6 billion at the end of the quarter, underscoring Aegon's leading position in this market. As you are aware, we want to develop our online bank, Knab, into a digital gateway for individual retirement solutions. In the third quarter of 2021, the online bank attracted 9,000 new fee-paying customers. This was offset by 11,000 customers leaving Knab, stemming from our decision to stop offering savings products to nonfee-paying customers as they were loss-making. Moving on to the United Kingdom. Assets under administration remained above the GBP 200 billion. Gross deposits increased, reflecting stronger investor sentiment as well as the benefits from ongoing investments in the business. This led to an improvement in retail net deposits. However, this was more than offset by the termination of a low-margin, investment-only scheme in the Workplace segment, which led to net outflows in this business. Expense savings initiatives and a favorable impact from market movements on assets have led to an improvement in the efficiency of the platform. This more than offsets the revenues lost from the gradual runoff of the traditional product portfolio. Let me now turn to our global asset management and our growth markets on Slide #6. In our Asset Management business, the operating margin of global platforms almost doubled as a result of higher revenues from net deposits and favorable market developments. Third-party net deposits on the global platforms amounted to EUR 2.4 billion driven by inflows on the fixed income platform. Net deposits in strategic partnerships were EUR 1.3 billion for the quarter driven by our joint venture in China. Continued net deposits, together with favorable equity markets, have led to a significant increase in management fees. This was offset by a normalization of performance fees compared with the exceptional levels seen in the same period last year, resulting in a decline in the operating result for strategic partnerships to EUR 44 million. To drive further growth, Aegon Asset Management's wholly owned subsidiary in Shanghai has completed its onshore investment advisory registration. This allows us to provide a range of global investment solutions, including those with an ESG focus, to Chinese institutions and high net worth investors. In Aegon's growth markets, we continue to invest in profitable growth. Sales growth in the bancassurance channel in Spain and Brazil was, however, offset by lower new life sales in China caused by an industry-wide lower demand for critical illness products. New premium production for property and casualty and accident and health insurance increased to EUR 21 million as a result of sales of new products in Spain and Portugal as we continue to see benefits for sales after the redesign of our digital sales channels through our Spanish bancassurance partners. I'm now on Page #7, turning to a topic that is on all our minds, sustainability and climate change. Our stakeholders and in the wider world expect us to act sustainably as an insurer, asset manager and employer. We recognize the role that Aegon plays a society with respect to responsible investing, and we continue to progress with our approach to sustainability. Coinciding with the COP26 Conference in Glasgow, we announced Aegon's group-wide commitment to transitioning our general account to net zero greenhouse gas emissions by 2050. In this context, Aegon has joined the Net-Zero Asset Owner Alliance. The United Nations convened group of institutional investors committed to transitioning their portfolios to net zero greenhouse gas emissions. To ensure progress towards this 2050 commitment, Aegon has set an intermediate target. By 2025, we aim to reduce the carbon intensity of our corporate fixed income and listed equity general account assets by 25% compared with 2019. On our path to net zero, we will regularly update our group-wide exclusion criteria and increase our engagement with the most carbon-intensive companies in our investment portfolio to achieve real-world carbon emission reductions. Next to our group-wide initiatives, our local units are taking additional actions and are working to meet the demand for ESG products from our customers. For instance, Aegon Asset Management has joined the Net-Zero Asset Managers Initiative, and our Dutch business will commit to an extended 2050 climate action plan to include separate account assets and off-balance sheet investments in addition to general account assets. Ahead of COP26, Aegon U.K., in partnership with Aegon Asset Management, launched its innovative global sustainable sovereign bond fund. The fund invests in those countries that are making the best progress towards the United Nations Sustainable Development Goals and allows our workplace pension customers to align their investment objectives with the goal of a fair and sustainable future. In summary, we continue to deliver on our strategic priorities and are making steady progress in growing our strategic assets and growth markets. We will continue to drive efficiencies while, at the same time, investing in products and services that better serve our customers in our various core businesses. And with this, I would like to hand it over to Matt who will talk about the results for the quarter and update you about our actions on the financial assets.
Thanks, Lard, and good morning, everyone. Let me start with the financials on Slide 9. Our operating result decreased compared with the third quarter of 2020 to EUR 443 million. Increased fees from higher equity markets and positive contributions from growth were more than offset by adverse claims experience in the U.S., which was mainly attributable to COVID-19 and a higher average claim size. Our balance sheet remains strong with the capital positions of all our 3 main units above their respective operating levels and the group Solvency II ratio at 209%. Cash capital at the holding decreased to EUR 961 million as anticipated and now sits in the middle of the operating range. The decrease reflects the payment of dividends and use of cash for additional deleveraging. Since mid-2020, our gross financial leverage has reduced by EUR 700 million and now stands at EUR 5.9 billion. This puts us on track to meet our target of reducing our gross financial leverage to EUR 5 billion to EUR 5.5 billion. We have also made good progress on the reduction of our economic interest rate exposure in the U.S. We have now almost fully executed the interest rate reduction plan that we announced at the Capital Markets Day by lengthening the duration of our asset portfolio and expanding the forward starting swap program. Together with the expansion of the dynamic hedging program for variable annuities and favorable market movements, this has led to a 75% reduction in the targeted interest rate risk since the third quarter of 2020. Let me now turn to Slide 10 to go into more detail on the expense savings. In the last 4 quarters, we reduced addressable expenses by EUR 253 million compared with 2019. EUR 248 million of these savings are driven by expense initiatives that are part of our operational improvement plan. This level of expense savings is comparable to what we had achieved through the second quarter. The benefit of the additional cost savings initiatives implemented this quarter was offset by higher onetime employee expenses. Our progress makes us confident that we will be able to achieve our expense savings target of EUR 400 million by 2023. When we created our operational improvement plan, we took into account the nature and complexity of the underlying initiatives. Most of the initiatives that we have implemented so far were relatively straightforward and led the savings coming through with a short lead time. Let me give you an example. We have implemented changes in our ways of working, for instance, in our risk and communications departments, we found ways for the holding and Aegon the Netherlands to work more closely together with shared processes, enabling a reduction in overall head count. Another example is in our Individual Solutions business in the United States where we have reduced the number of software subscriptions. In the coming quarters, we expect to see a more gradual delivery of expense savings. While we will continue to execute on our expense savings initiatives, we also need to absorb expense inflation and other upward pressures on expenses. In addition, some of the larger initiatives are still in progress and will take some time to fully execute. An example is Aegon Asset Management's migration to a new technology platform for its global operations that will drive expenses down and make the business more scalable and client focused. Next to the expense savings, we benefited again from lower travel and marketing activities due to the impact of the COVID-19 pandemic. These benefits have started to fall compared with previous quarters, and we expect them to go to 0 over time. Furthermore, we aim to profitably grow our business by improving customer service, enhancing user experience and launching new innovative products. These growth initiatives resulted in EUR 30 million of expenses in the last 4 quarters. Let me now turn to Slide 11. In the third quarter of 2021, our operating result amounted to EUR 443 million, a decrease of 16% compared with the same period last year. The apples-to-apples decrease is 13% at constant currencies when adjusted for the reclassification of the operating result of our CEE businesses to other income. The decrease in the operating result was driven by adverse claims experience in the U.S., which amounted to EUR 93 million. Deaths that were directly attributable to COVID-19 were in line with our expectations relative to U.S. population deaths. Furthermore, we saw a higher number of claims due to respiratory diseases this quarter. While the death certificates did not attribute all of these benefits to COVID-19, we believe that some of them are related to the virus. Deaths directly and indirectly attributable to COVID explain approximately 1/2 of the adverse claims experience. About 1/4 of the adverse mortality experience related to a higher average claim size. In line with our aim to improve our risk profile, we want to reduce the volatility in mortality experience, and we're in the process of exploring management actions to achieve this. The remaining adverse mortality was from increased frequency in line with what we have seen in the wider industry this quarter. The adverse mortality experience was partly offset by EUR 23 million of favorable morbidity experience in the long-term care book, which included a EUR 14 million release of the incurred but not reported reserve. In the Netherlands, the operating result increased by 8% to EUR 190 million. All lines of business contributed to the higher results, supported by the benefits of expense savings, business growth and favorable disability claims experience. In the U.K., the operating result increased by 47% to EUR 51 million driven by higher fee revenues as a consequence of favorable equity markets. The operating result from international decreased by 17% to EUR 36 million. However, on an apples-to-apples basis and at constant currencies, the operating result increased by 18%. This reflects business growth and favorable claims experience in Spain and Portugal and a reduction in crediting rates at Transamerica Life Bermuda. Finally, the operating result from Asset Management remained stable at EUR 58 million. Higher management fees offset a normalization in performance fees from Aegon's Chinese asset management joint venture compared with last year's exceptional level. Let us now turn from operating results to net result on the next slide. As you can see on Slide 12, the net loss amounted to EUR 60 million for the third quarter of 2021. Nonoperating items contributed to a gain of EUR 9 million before tax. Realized gains on investments of EUR 132 million and net recoveries of EUR 7 million more than offset a loss from fair value items of EUR 130 million. The latter resulted from an increase in the fair value of liabilities in the Netherlands. This was driven by an increase in inflation expectations and to a decrease in the owned credit spread used to discount certain liabilities. Other charges of EUR 559 million were largely driven by a EUR 470 million charge relating to the expansion of the variable annuity dynamic hedging program in the United States as well as to the lump sum buyout program in line with prior guidance. Onetime investments related to the operational improvement plan amounted to EUR 64 million. I'm now turning to Slide 13 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 2 percentage points during the quarter to 446%. The RBC ratio was adversely impacted by negative separate account returns in the variable annuity business. Interest rate movements during the quarter resulted in a loss on the macro interest rate hedge that was scaled up in anticipation of the expansion of the dynamic hedge program. The capital release from the lump sum buyout program was offset by the impact of expanding the dynamic hedge program. This led to a combined negative impact of 2 percentage points on the RBC ratio in line with prior guidance. In the Netherlands, the Solvency II ratio of the Dutch Life unit remained stable at 172%. Negative market impacts from rising inflation expectations and credit downgrades more than offset positive impacts from real estate revaluations, mortgage spread tightening and a flattening of the interest curve. Operating capital generation had a positive impact, which more than offset the EUR 25 million dividend payment to the group in this quarter. Scottish Equitable, our main legal entity in the U.K., increased its solvency ratio to 171%. Strong operating capital generation had a positive impact, and there were some benefits from a number of smaller onetime items. Let us now turn to the development of cash capital at holding on the next slide. As anticipated, cash capital at the holding decreased during the quarter to around the middle of the operating range. In the third quarter, gross remittances amounted to EUR 99 million. These were in part driven by capital release as a result of winding down both our Irish corporate insurance entity and our internal reinsurer Blue Square REIT. These remittances contributed to free cash flows to the holding, which were EUR 62 million this quarter. This brings year-to-date free cash flows to EUR 312 million and puts us in a good position to exceed the 2021 free cash flow guidance that we provided at our Capital Markets Day. These cash inflows were more than offset by the payment of dividends and previously announced redemption of USD 250 million perpetual capital securities. Capital injections amounted to EUR 53 million and were mainly driven by injections into our Brazilian joint venture that we had flagged last quarter. Other items led to a cash outflow of EUR 29 million driven by the previously announced share buyback in the context of variable compensation plans. Let me now turn to our financial assets, starting with the U.S. variable annuities business on Slide 15. We are taking both bilateral and unilateral actions to maximize the value of our U.S. variable annuities business. Last quarter, I highlighted 2 of them: the lump sum buyout program and the expansion of our dynamic hedging program. The lump sum buyout program was launched in July. This program was made available to certain variable annuity policyholders with guaranteed minimum income benefit riders. The program reduces Transamerica's economic exposure at a favorable price, reduces hedge costs for the remaining variable annuity portfolio going forward. At the end of the third quarter, the take-up rate of the program amounted to 8%, which is encouraging and exceeds those of similar programs run by Transamerica in the past. We have decided to extend the program to the end of January 2022 to allow customers more time to consider the offer. We expect the take-up rate by the end of January 2022 to exceed the original expectation of 15%. In the third quarter of 2021, Transamerica also scaled up the existing macro hedges in anticipation of the transition to a dynamic hedge program for all remaining legacy variable annuity policies. The dynamic hedging program was expanded in the first week of October and now covers the interest rate and equity risks embedded in the guarantees of our entire variable annuity portfolio. This builds on the dynamic hedging program that we have operated for policies with guaranteed minimum withdrawal benefits where the hedge effectiveness for the targeted risk amounted to 98% year-to-date. Dynamic hedging stabilizes cash flows and reduces our sensitivities to changes in equity markets and interest rates on an economic basis. The combined impact of extending the dynamic hedging to the full portfolio of variable annuities, together with the execution of the lump sum buyout program, was in line with prior guidance with a 2 percentage points negative impact on the RBC ratio. Another action that was implemented in the third quarter was an increase in rider fees on part of the variable annuity portfolio. Certain contracts allow policyholders to elect a step-up of the guaranteed base on a policy's rider anniversary if the policies account value exceeds the guarantee base. Transamerica will increase the fees to the contractually allowed maximum when a step-up is elected. This is a good example of our ongoing commitment to actively manage this financial asset. In short, the unilateral and bilateral actions to maximize the value of our variable annuity portfolio are well underway. Therefore, we have begun allocating internal resources to investigate our options for potential third-party solutions. We will update the market on our progress in this respect in the first half of 2022. Let's now go to Slide 16. We have progressed well on the in-force management of our long-term care book. In the third quarter of 2021, Transamerica obtained regulatory approvals for additional rate increases of USD 133 million, bringing the value of approvals achieved year-to-date to USD 309 million. This means that we have already achieved the expected USD 300 million benefit from this program, which underscores our track record of achieving actuarially justifiable rate increases. Based on these better-than-expected results to date, we have increased our expectations for the benefit from the current rate increase program from USD 300 million to USD 450 million. Long-term care claims for the third quarter came in at an actual to expected ratio of 83%. The level of new claims has returned to pre-pandemic levels. The claims experience reflects a USD 16 million release of the incurred but not reported reserve that was previously set up for delayed long-term care claims. Excluding this release, the actual to expected claims experienced for the third quarter of 2021 would have amounted to 95%, reflecting increased claims terminations due to the impact of the COVID-19 pandemic. Let me now turn to Slide 17. Our aim for the Dutch Life business is to turn it into a low-risk cash generator, paying predictable regular dividends. The Dutch Life business again remitted EUR 25 million to the group in the third quarter, in line with its quarterly remittance policy. Solvency II capital ratio of the Dutch Life business remained unchanged this quarter at 172% and was again above the operating range. In the second half of October, the Dutch Life business implemented an expense inflation hedge to further reduce the volatility of its capital ratio. To summarize, we continue to actively manage our risk and our capital position. To name a few examples, we've nearly completed the interest rate risk reduction plan in the U.S., we extended the dynamic hedging program to our legacy variable annuities, we expect to exceed our original expectation of a take-up rate of more than 15% for the lump sum buyout program, we increased our expectation for the long-term care rate increase programs to USD 450 million and we remain on track to achieve our expense savings target. And we will continue to take actions to improve risk profile. With that, I pass it back to you, Lard.
Thanks, Matt. So the take away from today's presentation is that we continue to drive our transformation forward by delivering on our financial and strategic commitments through the disciplined execution of our operational improvement plan and active management of the in-force business. At risk claims experience aside, the operating result development is encouraging and supported by the disciplined implementation of our operational improvement plan. We have reached important milestones for our financial assets, as Matt just laid out. We are benefiting from growth initiatives in our strategic assets and growth markets. And we have committed to net zero greenhouse gas emissions targets by 2050. In summary, I am satisfied with how we continue to deliver on our financial and strategic commitments. And I would like to open the call now for your questions. [Operator Instructions] Operator, please open the Q&A session.
[Operator Instructions] Our first question comes from Andrew Baker from Citi.
So both are actually on capital generation. First, specifically to the third quarter, it seems like there's quite a lot of moving pieces. Are you able to give an update on your view of the normalized run rate? So I guess the comparable number to the previous EUR 380 million pre holding company cost that you provided and maybe just talk through some of the moving parts of the quarter. And then secondly, related to the medium-term view, when can we expect an update to the EUR 1.3 billion 2023 target? And then can you also just confirm whether that included an assumption for a 15 basis point reduction in the UFR? And if so, can you just remind me what the impact of that was?
Matt? Thank you very much, Andrew, for your questions. So Matt, can you take?
Yes. So maybe I can walk you through the operating capital generation guidance that we have now for the full year, and I can walk through some of the moving parts here. So if you take the 3Q operating capital generation after the holding and funding expenses, that was EUR 327 million. Add back the holding and funding expenses and you get to EUR 390 million operating capital generation, again, before holding in funding expenses. And then some of the puts and takes. I mean, as I mentioned earlier, we had adverse claims experience on the mortality side. We had benefits on the morbidity side. But if you back that out, it adds about EUR 60 million to the run rate. And then we did have some good guys that you have to back out to. And in general, you can walk through it, but it's about EUR 50 million. So that leaves you with a clean run rate for the quarter of about EUR 400 million. And then as you look forward to the end of the year, we actually year-to-date operating cap gen within the business units before the holding and funding expenses amounted to about EUR 1.1 billion. Add the EUR 400 million clean from the run rate for the fourth quarter and then subtract out our expectations for COVID in the fourth quarter, which amounts to about EUR 40 million, and then take about EUR 10 million out for the impact of the dynamic hedging, remember that does reduce the operating capital generation going forward, and you get to right around the midpoint of that EUR 1.4 billion to EUR 1.5 billion range that we communicated last quarter, and we're going to retain that for this quarter. I hope that helps.
And the medium-term view? And whether the target includes the UFR reduction?
Yes. So you're right. So at the Capital Markets Day, we had included a $1.3 billion target for 2023. And that did not, by the way, include any impact from the 15 basis points reduction that we would now anticipate not happening in 2023, which would actually add another about EUR 100 million of operating capital generation. But there -- we always remind people that there are some headwinds here. We do have still continued low interest rates. Credit impairments are likely to step up here. We're not changing the guidance at this moment in time. But in general, we're getting the benefit from headwinds, and you can see it coming through in our operating cash gen guidance for 2012.
Michael Huttner from Berenberg.
And can you talk a little bit about the take-up rate expectation, what you're seeing? Where are we now at the end of October, or actually mid-November, in terms of take-up? And what kind of impact this could have in terms of RBC? I think at September, the 8% was 3.5%. And I was trying to gross it up, but I'm not very good at math. And then the other question is on the morbidity. So understood from your comments, EUR 23 million in Q3, including EUR 16 million of reserve releases. Are we kind of done with morbidity benefits? Or is there potentially still more to come? Or the EUR 300 million pricing you've spoken about, when will we see that in the numbers?
Yes. So let me take your take-up rate question first. So indeed, the experience on the lump sum buyout program through September stood at 8%. If we looked at it yesterday, it was about 14%. And you can't really extrapolate that going forward because the program itself ended at the end of October. And as you might expect, a lot of the take-up came at the very last part of it. So as of right now, it's about 14%. Now what we are going to do is extend that offer forward through the end of January in 2022. So that 14% will accumulate, it will get bigger, but probably at a slower pace than what we saw in the first stage of the program. With respect to the morbidity experience, yes, indeed, we are still getting morbidity benefits. However, we see that the entrances to long-term care facilities are picking up in line with pre-COVID levels. You saw that we released a portion of the IBNR reserve in the third quarter, we'll release the remainder of the $44 million IBNR reserve pretty much levelly throughout 2Q of next year. On the rate increases, indeed, we had exceeded our expectations on the long-term care price increases. So now we stand a little bit more than $300 million. And we are extending that and we now put a target out there of $450 million. The $100 million of that is going to be reflected in what we say our premium deficiency reserve by the end of the year. And the balance of that will come in over time. You'll see it reflected in capital generation over time. The other question that you had was the also impact on RBC. So the overall program impact was 3.5%. So it improved the ratio by 3.5%. And we would expect that, again, we're going to extend the program. But again, that was based on the 8% take-up rate. We would expect to get incremental improvements through the end of January, and we'll see that come through in our RBC ratio by the end of the year and also into the first quarter of next year.
David Barma from Exane BNP Paribas.
On U.S. variable annuities, just to come back on that. In light of your high expectations for the buyout take-up rate, and your comments, Matt, on fee increases in some contracts, can you remind us what you expect for the run rate capital generation on that line to be, please? And then secondly, on U.S. mortality, so quite high in the quarter. And I assume a split in COVID-related from the rest is a bit difficult, but any color on underlying trends would be helpful there. And also, you say you want to take actions to reduce the sensitivity to mortality. How do you plan to achieve that?
Yes. Thanks, David. So Matt, over to you again.
Yes. So on the VA run rate capital generation, in the last quarter, we had said that we would reduce operating cap gen by about $50 million as a consequence of implementing both the lump sum buyout program and the dynamic hedging and that we would be in a range of $250 million to $300 million operating cap gen on an annual basis, and we're retaining that guidance. So we came in pretty much exactly where we thought we were going to be. So the number is $250 million to $300 million on an annualized basis. Maybe on the mortality in the U.S., I mean the way that we really think about this is that we did have, you could say, the impacts of direct and indirect COVID claims that represented about 1/2 of the adverse experience that we saw in the quarter. So if you work in U.S. dollars, we had $111 million worth of adverse mortality experience. Part of it was directly related. So that's just the case where -- I think $46 million of that was related to COVID where we get a claim in, and we got the debt certificate, and it's written COVID-19 as the cause of death. But as I said in my opening remarks, we're also seeing elevated claims from things like respiratory illnesses, which are guiding us, saying that there is a portion of other claims that are not directly COVID related, that are more indirectly related. And if you add those 2 components, then it's like 1/2 of the total amount of the deviation. The other part of it is we did have an increase in the overall average claim size during the course of the quarter which contributed to about 1/4 of the overall mortality experience. This is just what I would call normal average-sized claims deviation. We did see a number of higher face amount contract claims that came in during the course of the quarter. You asked a question around management actions. And indeed, we are going to try to take some steps here. This is typically done through reinsurance, and we will be looking at that to reduce the amount of, let's say, the claims volatility in terms of case size. And then the remainder of it, we would attribute it to just frequency number. There were just a higher number of claims during the quarter, which was quite consistent with what we have seen in the U.S. industry. So I think that will come as no surprise. I think that covers your questions.
Fulin Liang, Morgan Stanley.
Two questions, please. The first one is about your deleveraging plan because, if I look at the holdco liquidity, it's like in the middle of your kind of target rent. But actually, the total leverage is still above your long-term target. Apparently, you still need to do another further EUR 0.5 billion to EUR 1 billion deleveraging. Originally, I thought that would be kind of -- with the CEE deal being completed, that would kind of give you the cash to do that. But now with the CEE deal kind of pending, would you actually kind of still go ahead with the deleveraging target or your deleveraging is actually conditional on the CEE deal's completion? So that is first question. And the second one is I'm still a little bit -- just clarify that number. You kind of iterated your EUR 1.4 billion to EUR 1.5 billion clean capital generation guidance kind of for 2021. But your original strategic plan was EUR 1.3 billion for 2023. So there seems like a kind of disconnection there. Could you kind of talk me through about what's the moving blocks between the current higher target versus a slightly lower target in 2 years' time?
Yes, certainly. So on the deleveraging side, so we are a hair below the midpoint of the operating range for cash capital at the holding. But I would just remind you that we typically get relatively low dividends and remittances from the business units in the third quarter. A lot of the remittances come in, in the fourth quarter. So that's not a particular concern for us. With respect to the deleveraging target, we're committed to doing that EUR 5 billion to EUR 5.5 billion whether CEE closes or not. So we are going to continue with our deleveraging plan there. With respect to the capital generation, so what we're targeting here is a EUR 1.4 billion to EUR 1.5 billion operating capital generation in the business units for 2021. And that includes everything. So that includes the effects of adverse mortality. But it does include also the benefit that we are getting from the tailwinds in the equity markets, to a certain extent, the interest rate markets as well. Whereas when we came out with our capital markets guidance back in December, we were anticipating some pretty nasty markets, so low equity markets, we were anticipating still the level of COVID claims, although they're coming in a little bit higher and longer than what we had anticipated. So I guess the point here is that there's going to be -- if markets stay the way that they are, there will be a moment in time when we'll have to adjust that longer-term guidance. But for right now, we're not going to do that. We're going to stick with the guidance that we do for 2021 and go on.
Michele Ballatore from KBW.
Yes. So 2 questions. So the first question is about the CEE. I mean what is the status there in terms of how it's proceeding? I mean there is a new probe on the Hungarian veto. Do you think there will be a point where Vienna Insurance Group will say, well, that's just not feasible? So just an update there. And the second question is about solvency. And on solvency especially -- so you had the positive effect on the RBC coming from a better experience in mortgage foreclosure. You had a negative impact in the Netherlands from inflation. I wanted to just have a sense of this trend. How will this evolve in the coming quarters?
Yes. Thanks, Michele. So on the Vienna Insurance Group, to remind everybody, we sold the business in Hungary, Poland, Romania and Turkey. So the Vienna Insurance Group is in the lead of getting all the required approvals, and they are busy doing that. We are supporting them in that effort, of course. When it comes to Hungary, they are still in constructive dialogue with the Hungarian government and trying to find a way to resolve the situation. And we are just patiently awaiting the outcome of that. And then what it is, when we talk about the solvency, et cetera, so Matt, can you take that piece of the question of Michele?
Yes. So I think to your first one, you're thinking about how much of these points that you would raise with respect to the RBC ratio, for example, in the U.S. related to that mortgage thing and the Dutch inflation expectations. On the first one, on the RBC ratio, that mortgage thing is really a one-off. So it's actually a very small movement in the RBC ratio. On the Dutch inflation side, they ended up the quarter at 172% solvency, and that was negatively impacted by increased inflation expectations that they have to reflect in the value of liabilities. But after the quarter ended in October, they did put on additional inflation hedges. So now the movement in own funds related to future inflation is really immunized. So that has no further impact.
Our next question comes from Henry Heathfield from Morningstar.
Can you hear me?
Yes, we can hear you, Henry.
Just one question really on this, just coming to the VA take-up rate that's been set at 15% for end of Jan. If you can really excuse my ignorance, I don't mean to downrate this question, but 15% down is like quite a low number. And so I'm just wondering if you could kind of outline how you set that number, how you set that target and what it really relates to in the grand scheme of things. Did you understand what I was trying to get that?
No, not quite. But could you please elaborate? Because our take-up rate at the end of September was 8%. We have expressed that we believe that the 15% would be a real success. And by now, so we're now post the quarter end, since yesterday, we're at nearly 15% at 14%. And we are extending the program to the end of January. So we expect actually to exceed the 15% rate that we internally regard as a very successful one.
I'm not disputing that 15% wouldn't be a successful level. I'm just saying, essentially, in my very limited understanding, 15%, for me, from the outside, it sounds like a low number in terms of your offering a 15% buyout for the policyholders. And then 15% of those policies, you're targeting 50% of the policyholders taking up that buyout offer. So just from an outside perspective, not understanding internally what kind of levels are normal and normally expected. The 15%, just from an outside perspective, is quite a low number for a take-up, although I'm not saying that that's an unsuccessful number anyway.
Yes. So yes, I now understand where you're coming from. So let me start, Henry, and then Matt will expand on this. This is not our first rodeo. In fact, this is the third time that we're doing also a program like this. So Transamerica is quite, let's say, experienced in this. So we know how it works. We know what kind of rate uptake we can expect. We know how, in the entire process, the dynamic around the take-up works. So in that sense, we are experienced in this. But Matt, you may want to expand on what the financial benefit of this is because we're releasing the economic value to liabilities.
Yes. I mean maybe I'll just expand on what Lard said, obviously, he's exactly right. So we have hit this book before with previous offers, so that many have taken it in the past. And now we're in the third time after this, and I think a 15% take-up rate would be a reasonable result. We think we can get beyond that, by the way, but that's really based on the -- setting our expectations based on prior experience also with this block. That's how we kind of set our target. Maybe to put a little bit more specific maths around this. So the 8% take-up rate resulted in capital generation of about USD 80 million during the course of the third quarter, and that's generally pretty linear. So to the extent that we get a higher percentage then we would see commensurate levels of capital generation going forward. And as I think we said earlier that currently, we're standing at 14%, on the road to 15, and we'll likely surpass.
And then the take-up rate is a percentage of policyholders that are offered, accepted the offer essentially. I mean it's take-up, right?
That's exactly right.
Benoit Petrarque from Kepler Cheuvreux.
My question is actually on the inflation. I mean the U.S. inflation figure, which was pretty high actually yesterday, and we could get more inflation in the U.S. next year. So I just wanted to understand how that could play on your U.S. business. Normally, there is a kind of offset with higher interest rates, but you've hedged that a lot now. So the U.S. higher inflation could play on metrics like operating capital generation. I wanted to understand what you have there in terms of assumptions. And also on the long-term care business, whether we should expect maybe some headwinds from that and if actually the price increase you've been getting this quarter is actually an offset to higher inflation going forward. So that's more kind of broad question on kind of how the U.S. inflation could impact your business going forward.
I'll hand over to Matt. I mean we all know there's a debate in the market now going to whether this inflation is temporary in nature or not, but let's not speculate on that. Matt, the question that Benoit just said on inflation.
So maybe I can do inflation for kind of in a broader sense, but I'll come back specifically to the U.S. in 1 second. So the first thing, I would say there are 3 main areas when we think about inflation risk that we have to think about. The first one relates to the expense savings program that we have out there. So we have a EUR 400 million expense savings program. Where we are going to be facing headwinds from increased inflation, we did embed inflation expectations into that overall savings, but that could be a potential area where we would be -- if there's more than moderate levels of inflation, then we could be a little bit at risk. But I would say that, and you've seen it in the presentation, that we are on track to hit our target here with respect to that EUR 400 million program. The other one, and this is more to the Netherlands, and it relates to the inflation risk on the capital position. But as I said in an earlier answer, it looks like we have that one pretty much fully hedged, both from a standpoint of the expense inflation risk within the capital but also with respect to the contract guarantees that we have for certain pension contracts where a lot of that has been hedged from the very beginning, and we've expanded that program some. So from a Dutch solvency ratio perspective, I think we've got that one covered also. And so now to get to the U.S., you mentioned particularly the long-term care business, and that's where we are the most exposed to inflation risk. I always have to remind people that in the long-term care business, we're not thinking about medical inflation, we're talking more about general wage inflation. So there's a couple of aspects to this. I guess the first one is that the way that the benefit is constructed to the contract holder, there are maximum amounts both at the daily level and a policy level that we would pay out. So in a way, that is a cap to our inflation risk after that, and the policyholder is really taking on that risk themselves. The other offset that we've seen happen in the long-term care business is there's more of a tendency to seek at-home care rather than to enter into a long-term care facility. We see that the expenses related to home care, at least as far as our books are concerned, are about 25% less than that they would be in a long-term care facility. So there is potentially some offset. The other one is that we have gone actively to long-term care contract holders to think about reducing the levels of their daily benefits. And in return for a lower premium, we're not having a fixed premium rate increase. And by lowering that daily benefit or by lowering the policy benefit, then we have an opportunity to mitigate the risk inflation going forward in that book. So it's something to watch out for. In general, if we get higher inflation where it's paired up with higher levels of interest rates, then that's actually a good thing, net-net, for us. Even though we have closed a lot of our interest rate gap or interest rate exposure there, we do benefit from higher interest rates. So it's a little bit of a mixed bag as far as we're concerned, but I think that's about it.
Next question, Robin van den Broek, Mediobanca.
The first one is on remittances. Year-to-date, you've come close to EUR 500 million. You alluded in the call before that Q4 is more of an interesting quarter when it comes to remittances. So given your RBC ratio is also at very healthy levels, what should we expect there also versus your target? And I was also wondering if you could include in that comment what kind of regulatory movements we can still expect. Are these asset charges changes finally coming through Q4? And secondly, I guess, Lard, since you've started as CEO, you haven't had much opportunity to travel and visit the business units. But over the last few months, I'd assume you had some opportunities to do so. And I was wondering if you wanted to share your experience from that.
Yes, of course, more than happy to do so. So Robin, thanks for your questions. Yes, indeed, I started as CEO in the middle of the pandemic. So I did not have a lot of chance to meet many people in person. So I've been spending a lot of my time, like all of you, by the way, Zoom-ing my life away, if you will. But over the last months, and certainly after the summer, I spent quite a number of weeks in the U.S. together with our new management team there. And a couple of observations that I have there. Number one, I went to see a lot of distribution actually. And what I found is we all want to get Transamerica back, right? I mean Transamerica was a market leader in the U.S. and has lost market share over the last years. So we want to improve it. So I've hired a new team. We're having all kinds of plans to turn that business and make it much better performing and growing faster. And the good news that I found from all those conversations with distribution is that Transamerica is just a fantastic brand, and many people want Transamerica back at the top of the league tables. So I think that's one thing that I would have as a takeaway. Secondly, I would have as a takeaway that the new team that we recruited there. So Will Fuller as the CEO; and Chris Ashe as the new CFO, but also many other appointments that we have made. So we have appointed a new, well, let's say, a counterpart to Duncan Russell. So it's Duncan the key person in the U.S. to work with Chris Giovanni. And we have also appointed a number of other financial talents in the point of Matt Keppler as a Head of Financial assets. All people who are highly experienced in this, we have worked with before. And as a result, I was also quite pleased to see how they have settled in and how they are working to increase the value creation out of the variable annuity book but also the clear separation between what we call financial assets and the focus on growth and growth assets and growth product lines. I think that's in a much better place. There's more focus in the business and there is good excitement and enthusiasm. Of course, despite of the COVID pandemic, right, because we still see back and forth how people can get back to the office. I spend time with the sales teams in the U.S. both in the retirement side and in the individual solutions side. I spent time WFG. Last week, I spent time with a lot of our financial distribution partners. And actually, next week, I'm again in the U.S. to talk to distribution, to work with Will on the plans for growing the business further. So I must say that I'm spending more time on the ground with the teams. I'd love to do that, as you may know, so that's really good. And at the same time, I've also spent time in the U.K. business, et cetera. So yes, I will not make this a travel log, but I can tell you that I find it personally, as you know, quite a lot of fun to work hard on improving this business. But with that, the remittances, I think that's something that's on your mind, so Matt, the questions of Robin around remittances.
Yes. Just as a brief reminder here, the Capital Markets Day guidance we gave for gross remittances for 2021 was something in the EUR 600 million to EUR 700 million range. And you also remember that we're trying to tie our cash dividend to our sustainable free cash flows. And you remember from last quarter, we had increased our interim dividend by $0.02 a share, which gives you a little bit of an inclination to where we think the free cash flow is going. So in fact, it's right. So we are now -- the minimum amount of gross remittances that we'll get out of the units for the full year is EUR 750 million, again, at a minimum. I think, Robin, you also asked about any other regulatory movements. I would point out that the one that you had called out. We still do have a change in the risk-based capital factors for certain asset classes within the U.S. It's a negative impact on credit. It's a positive impact on real estate. But net-net-net, you're talking about perhaps 10 percentage points negative on the U.S. RBC ratio, and that will be reflected in the fourth quarter results.
And we will now take our last question from Farquhar Murray from Autonomous Research.
Just 2 questions from mine. Firstly, on the inflation hedge that was put on. Could I just get a sense of whether there was a cost to that going forward and [ thereafter ] particularly with regards to capital generation. And just into the take-up, just to be precise, should I take it that essentially the solvency ratio struck on the 8% level take-up that you had at the [ tricky ] point? And I think you kind of have to give some sensitivity, but I presume there's a couple of points extra on top of that given that we're going from 8% towards 14% or something well. Is that fair?
Yes. So on the inflation hedge in the Netherlands, what's the impact on capital generation? Negligible. On the take-up rate in the U.S., yes, the take-up rate was 8%. And I think we did the math on that to say that 8% relates to about 3.5% on the solvency ratio, a little bit over $70 million in capital generation. It was struck at that moment, so that we would anticipate further positive impact as that goes forward. The one thing I would mention is that you remember that we did take a charge of about USD 560 million related to the combination of the lump sum buyout program and the dynamic hedging. But on that one, we anticipated further movements in these kind of things. So you're not going to see that continue to bleed in over time. So we've taken all the impacts for any future take-up rate improvements in this quarter. So capital impacts come, and then we've already taken the negatives on the IFRS equity.
With this, I would like to hand the call back over to Jan Willem for any additional or closing remarks.
Thank you, operator. This concludes today's Q&A session. On behalf of Lard and Matt, I thank you for your interest. Should you have any remaining questions, please do get in touch with Investor Relations. We're happy to help. Have a good day, and thank you for your participation in today's call.
Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.