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Good day, and thank you for standing by. Welcome to the Aegon 3Q 2022 Results Call. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand the conference over to Jan Willem Weidema, Head of Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining this conference call on Aegon's Third Quarter 2022 results. 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. With me today are Aegon's CEO, Lard Friese; CFO, Matt Rider; and Chief Transformation Officer, Duncan Russell, who will take you through our 3Q results and the progress we are making in the transformation of Aegon. After that, we will continue with our Q&A session. And on that note, I would like to give the floor to Lard Friese.
Yes. Thanks, Jan Willem, and good morning, everyone. We appreciate that you're joining us on today's call. It's been a busy few months for us here at Aegon, and I want to start by running you through our achievements on Slide #2. In the past few months, we have taken a number of important steps in the transformation of Aegon. We have made substantial progress on our operational improvement plan and taken additional actions to maximize the value of both our U.S. variable annuity book and TLB, our high net worth insurance business. And of course, we recently announced the combination of Aegon the Netherlands with ASR. We also made solid progress on our ambition to grow our strategic assets, especially in our life and retirement businesses, despite continued financial market volatility and political unrest. Our operating results in the third quarter declined by 11% on a constant currency basis, reflecting adverse market conditions that more than offset an improvement in claims experience in the United States, expense savings and the benefit from growth initiatives. Based on extensive analysis and the learnings from engagements with third parties, we have concluded that the best option with respect to our U.S. variable annuity portfolio is to continue to own and actively manage it, at least in the near term. Furthermore, we recently completed an internal reinsurance transaction between TLB and Transamerica that freed up USD 600 million of excess capital. This will, in part, be used to create a buffer to mitigate the impact of adverse equity markets, which materially reduces the capital sensitivity of our U.S. variable annuity book. But we're not done yet. We continue to see opportunities for growth and greater efficiency, and we will remain focused on the execution of our strategic agenda.
So let's turn to Slide 3. In October, we took a pivotal step in our transformation with the agreement to combine our Dutch activities with those of ASR to create a leading insurance company in the Netherlands. The transaction enables us to accelerate the return of capital to stockholders. It also propels our strategy of releasing capital from mature businesses and building advantaged businesses in our chosen markets where Aegon is well positioned for growth. Additionally, the long-term asset management agreement that we have entered into with ASR strengthens our position as a provider of fiduciary services, retirement, multi-asset solutions, fixed income and responsible investing. We are excited about the transaction and the opportunities it brings.
After the closing, we will hold a strategic stake of almost 30% in ASR. And through this stake, we will benefit from the synergies that this in-market consolidation brings. The majority of the cash proceeds from the transaction will be used to return capital to shareholders. We expect the transaction, the synergies and the capital deployment to result in accretion of the free cash flow per share over time. We have started the preparations to get approvals from the relevant stakeholders, and we initiated a program to disentangle the Dutch business from the group to ensure a smooth transition to ASR.
Slide #4 highlights the good progress we continue to make with the execution of our operational improvement plan. We have now implemented most of the more than 1,200 initiatives that are part of this plan. Just in the last 3 months, we completed another 100 initiatives, and our efforts are bearing fruit. Expense initiatives resulted in a reduction of annual addressable expenses of EUR 300 million in the trailing 4 quarters compared with the base year 2019. This is an increase of EUR 50 million compared with last quarter. We have been able to absorb inflationary headwinds and further reduce our expense base towards the goal of EUR 400 million expense savings by 2023. We are also increasingly seeing the benefits from our 260 growth initiatives that we have executed so far. Over the trailing 4 quarters, growth initiatives contributed EUR 264 million to our operating results. In light of the announced transaction with ASR, we will update our expense savings target and other targets in due course. And in the meantime, we will remain disciplined and focused on improving the operational performance across all our businesses. Slide #5 zooms in on the progress of our U.S. strategic assets. In individual solutions, we have the ambition to regain a top 5 position in selected life products over the coming years. And as you can see, commercial momentum remains strong in this segment. New life sales increased by 24% compared with the third quarter of last year. This was supported by the World Financial Group distribution channel where the number of licensed life agents grew another 10% compared with last year and now stands at nearly 60,000 agents.
In the retirement business, Transamerica aims to compete as a top 5 player in new middle market sales. Written sales were USD 805 million this quarter, which is lower than the same period last year. Nevertheless, I'm satisfied with the results, considering the difficult circumstances with planned sponsors being hesitant to move retirement plans given the current volatile markets. Strong written sales in prior periods supported an increase in net deposits for the middle market to USD 532 million. We will build upon Transamerica's emerging commercial momentum and intend to invest capital to profitably grow our market share in selected product lines. We will share more details on our plans to profitably grow Transamerica as well as the U.K., our growth markets and our global asset manager at a Capital Markets Day in the second quarter of 2023.
Turning to Slide 6, where we highlight the performance of our Dutch and U.K. strategic assets. I will start with the Netherlands where we are a leading player in both mortgage origination and defined contribution pensions and continue to attract new customers. Mortgage sales decreased to EUR 2 billion as the Dutch housing market is cooling down. Nevertheless, mortgages under administration continue to grow, partially due to lower client prepayment activity that now amount to more than EUR 62 billion. We also continue to consistently grow our workplace business mainly driven by sustained strong demand for PPIs. Net deposits for defined contribution pension products increased by 35% to EUR 245 million in the third quarter of 2022. Moving on to United Kingdom. In the third quarter of 2022, the platform business across the retail and workplace channels generated net deposits of GBP 83 million. Our workplace business delivered another quarter of positive net deposits. Outflows in retail reflects the impact of market volatility on customer confidence and their propensity to invest in line with what we have seen across our industry. Revenues for the overall U.K. business declined as a result of the anticipated granular runoff of the traditional product portfolio. Despite the unfavorable impact of adverse markets under assets under administration, the efficiency of the platform deteriorated only slightly as a result of the steps we made to reduce expenses.
Slide #7 shows that our Asset Management business saw third-party net outflows in the global platforms, which reflect the challenging market conditions and the fact that customers freed up liquidity in a rising interest rate environment. Third-party net deposits and strategic partnerships of EUR 1.5 billion more than offset the EUR 1 billion outflows in global platforms, leading, in fact, to positive net deposits for Asset Management overall. The operating margin of global platforms improved by around 2 percentage points to approximately 15%, driven by lower expenses. This includes a reduction in accruals for variable compensation. The operating result from strategic partnerships decreased by 38% as performance fees for our Chinese Asset Management joint venture reduced from last year's elevated level due to adverse market conditions. In our growth markets, Aegon is investing in profitable growth. New life sales from these markets increased by 16% to EUR 54 million and non-life sales grew by 17% to EUR 25 million.
In summary, we remain focused on executing our strategic agenda and continue to maintain a high pace in transforming Aegon despite the challenging backdrop. Duncan will now provide you with more detailed information on the actions we have taken regarding TLB and the U.S. variable annuities book. Duncan, over to you.
Thank you, Lard. Let's move to Slide 9. At our Capital Markets Day, we laid out our strategy to focus on three core markets, three growth markets and one global asset manager. We made clear that businesses outside the core perimeter will be managed with tight capital and a bias to exit.
We made good progress on our portfolio rationalization, whether it's through the divestment of Central and Eastern Europe or our various actions to release capital by winding down or selling subscale ventures and businesses. TLB, our high net worth business was the largest remaining operation outside the core perimeter. In the past 2 years, it has been managed with a focus on strict cost control and capital efficiency to increase its capital generation. Over the past years, we have considered different strategic options for TLB, including a divestment. Following this review, we have decided to extend our internal reinsurance of TLB's closed block to Transamerica. As of the fourth quarter of 2022, Transamerica will also reinsure the remaining 75% of TLB's close book of universal life policies that have previously not been reinsured, meaning that 100% will now be internally reinsured. Transamerica will hold additional reserves to cover the underlying risks, but it will also be allowed to recognize excess capital of TLB in its capital position. This frees up around $600 million of excess capital on a U.S. level, which will increase Transamerica's RBC ratio by approximately 30 percentage points in the fourth quarter of 2022.
As a consequence, we feel that we have landed on the optimal solution for TLB compared to the alternatives and therefore, we'll classify the business going forward as a financial asset with a continued focus on improving cash flows and disciplined capital management. Next, on Slide 10, let me update you on our variable annuity business. In recent months, we have engaged with third parties to explore the possibility for a reinsurance deal. These interactions gave us confidence in our actuarial assumption set for variable annuities. And we saw that these third parties aim to manage the liabilities economically just as we do. Put simply, we witnessed a management approach and philosophy around VA that was consistent with where we have taken the block in recent years.
Following these interactions, we have decided not to engage further on a variable annuity transaction at this point in time. There are three main reasons for this. First, a transaction will lead to significant counterparty exposure, given the size of the variable annuity business we have. And we have concluded that doing a smaller deal and thus reducing potential counterparty exposure wouldn't represent a good use of time and effort, given the intensity of these processes.
Second, we would need to deal with stranded costs as the variable annuity block supports a substantial amount of overhead expense. These costs will need to be addressed as the block shrink naturally over time in an orderly manner. Over time, as the variable annuity block runs off, and we successfully grow our strategic assets, stranded costs and counterparty risk will become less of a consideration for us.
Thirdly, with respect to valuation, the block under our ownership benefits from 2 main items: Number one, Transamerica benefits from a lower cost of liquidity management, given its overall large and diversified balance sheet; number two, we believe there is value in the emergence of fees on the base contracts as these are asset management like in nature. Other parties tend to hedge the base fees due to the volatility in the capital position it creates, in particular, on a smaller balance sheet. For this reason, we concluded also that the value benefit of the transaction was unlikely to be compelling.
Now our work on the block does not stop. In October, we have taken another management action on the variable annuity portfolio following on from the actions we've taken so far. We've decided to set the voluntary reserves, which reduces the amount of base fees reflected in the capital position. Second, the reserve will reduce the RBC ratio by approximately 15 percentage points in the fourth quarter of 2022. But by setting up the reserve, the recognition of base fees in our capital position will be more closely aligned when they are earned. As a result, the sensitivity of the RBC ratio to a 25% decline in equity markets will reduce by about 1/3. When taken in conjunction with previous actions we have put in place, for example, the dynamic hedging and the policy buyouts, this additional action brings further stability and quality to capital generation as the variable annuity block runs off. I would now like to hand over to Matt to address the financial performance of Aegon in the third quarter.
Ladies and gentlemen, we're just facing a connection issue. Your line will be connected back shortly. Thank you so much.
Is everybody back? What's our status here, operator?
Yes, sir, you are now back on the call. Everyone can hear you. You can go ahead with your conference. Thank you.
Let's go back to the -- okay, terrific. I'll just go back to the beginning. We're on Slide 12, everyone. Aegon's operating result decreased by 3%, but by 11% on a constant currency basis to EUR 429 million. Lower fees due to adverse market movements and expected outflows in variable annuities more than offset the benefits from expense savings, growth initiatives and an improvement in claims experience. As Lard mentioned, addressable expense savings for the trailing 4 quarters increased by EUR 50 million over the last quarter and now total EUR 300 million compared with the full year 2019 expense base. Operating capital generation before holding funding and operating expenses amounted to EUR 399 million, mainly reflecting strong performance from the U.S. driven by income from alternative investments and seasonality and reserve movements in the U.S. Cash capital at the holding decreased to EUR 1.4 billion, mainly as a result of EUR 373 million of capital being returned to shareholders which more than offset this quarter's free cash flow of EUR 67 million. Our gross financial leverage amounted to EUR 5.8 billion, which is slightly higher than last quarter due to the strengthening of the U.S. dollar.
As mentioned in the press release we issued on October 27, we intend to use up to EUR 700 million of the cash proceeds from the transaction with ASR to reduce our leverage further. Our balance sheet remains strong with the capital positions of all three of our main units remaining above their respective operating levels. The group Solvency II ratio decreased by 2 percentage points over the third quarter to 212%, mainly from market movements. Furthermore, eligible own funds reduced due to tiering restrictions on the amount of deferred tax assets that we are allowed to recognize as capital. Turning to Slide 13. We saw the third quarter operating result come in at EUR 429 million. Adverse markets have impacted our results, in particular, in Asset Management and in the United States. The operating result in the U.S. decreased by 4% or 19% on a constant currency basis to EUR 156 million. The primary driver of this was a lower result from variable annuities where fee income was negatively impacted by adverse markets and expected outflows. This was partially offset by an improvement in net claims experience in life and health. Mortality claims experience was EUR 30 million unfavorable in the quarter, of which EUR 12 million related to deaths directly attributable to COVID-19, with the remainder due to a higher-than-average claim size. Morbidity experience for the quarter was in line with expectations. In the Netherlands, the operating result from our bank Knab and from workplace solutions increased supported by business growth. This was more than offset by a decrease in operating results from life and mortgages from lower investment income and lower mortgage prepayment compensations. In the U.K., fee revenues declined as a result of unfavorable market developments and the runoff of the traditional product portfolio. This was more than offset by lower addressable expenses driven by the operational improvement plan. Once again, Aegon international performed well, delivering growth across all businesses, and showing improved claims experience compared to the same period last year. Finally, the operating result from Asset Management decreased by 25%, mainly driven by lower performance fees in the Chinese asset management joint venture, which were negatively impacted by poor equity markets. While market movements negatively impacted revenues and global platforms, the operating result actually showed improvement over the year-ago quarter due to lower addressable expenses. Let us go now to Slide 14, where we show that the net loss for the quarter amounted to EUR 206 million. Nonoperating items totaled a loss of EUR 622 million, mainly driven by an accounting mismatch related to the interest rate hedges for our legacy U.S. variable annuities. This program hedges the economic liability. However, under IFRS, we carry the hedge assets at market value while the liabilities for guaranteed minimum death benefits and guaranteed minimum income benefits are calculated using locked-in discount rates. The increase in interest rates during the quarter, therefore, drove a fair value loss as a consequence of this accounting mismatch. Realized losses amounted to EUR 127 million from the sale of sovereign and corporate bonds in a rising interest rate environment, consistent with Aegon's strict liquidity framework. Other charges amounted to EUR 107 million, reflecting EUR 79 million of onetime investments related to the operational improvement plan. On Slide 15, I want to go through the capital positions of our main units, all of which ended the quarter above their respective operating levels. The U.S. RBC ratio decreased 12 percentage points over the quarter to 404%. The RBC ratio was negatively impacted by unfavorable market movements. Benefit from the operating capital generation was offset by USD 200 million of dividends to the U.S. intermediate holding company. These remittances from the operating companies were made in order to prefund the majority of the remittance to the holding anticipated to occur in the fourth quarter of this year. Please note that the net 15 percentage point positive impact from the reinsurance transaction with the TLB and the setup of the voluntary reserve and variable annuities that Duncan mentioned will be reflected in the RBC ratio in the fourth quarter.
The Solvency II ratio of the Dutch Life unit increased to 207%, particularly from a tightening of mortgage spreads and a flattening of the interest rate curve. The solvency ratio of Scottish Equitable, our main legal entity in the U.K., increased by 1 percentage point to 179%. On Slide 16, you can see that the cash capital at the holding came down to EUR 1.4 billion during the quarter, which is close to the top end of the operating range. This quarter, we returned EUR 373 million of capital to shareholders through dividends and the second tranche of the share buyback program announced in March. We still have one tranche of EUR 100 million from the share buyback program to go, which is expected to be completed during the fourth quarter of 2022. Slide 17 summarizes the great strides we have made in recent months in maximizing the value of our financial assets. In the third quarter, we continued our track record of successfully hedging the targeted risks embedded in our variable annuity guarantees. We achieved 97% hedge effectiveness despite significant volatility in financial markets. This is another example of how we are stabilizing the capital generation from this block of business. In long-term care, I am pleased that we obtained regulatory approvals for additional rate increases worth USD 59 million. The total value of approvals achieved since the start of the program now stands at $450 million. This means that we have achieved our target for this program, which we upgraded a year ago from the $300 million target that we had set ourselves at the Capital Markets Day back in 2020. We will continue to work with state regulators to get pending and future actuarially justified rate increases approved. The Dutch Life business, again paid its remittance of EUR 50 million, which was well covered by the EUR 63 million operating capital generation for the quarter. And as just explained by Duncan, TLB will also be managed as a financial asset going forward. The reinsurance transaction that we announced today will free up capital and strengthen Transamerica's capital position.
And with that final note, I now pass it back to you, Lard, for the wrap-up.
Yes. Thanks, Matt. Let's go to Slide 19. I'd like to reiterate that we are maintaining a high base in Aegon's transformation. We are making good progress on the operational improvement plan, we are maximizing the value of our financial assets, and we are investing in profitable growth. I'm therefore confident about delivering on our strategic and financial commitments. As a final note, I want to share my appreciation for the hard work and dedication of all colleagues to support our customers' needs in challenging times. Specifically, our employees who are affected by the transaction with ASR and who continue to work tirelessly to improve our performance despite the uncertainty that the transaction brings for them personally. It is thanks to the efforts of our employees that we are able to continue to improve our operational performance and accelerate our strategy.
I would now like to open the call for your questions. Please be so kind as to limit yourself to 2 questions per person. Operator, please open the Q&A session.
[Operator Instructions] The first question from Andrew Baker from Citi.
So the first is on capital generation. Just wondering if you could provide some of the usual moving parts on the capital generation and what you see in the clean quarterly run rate for both Q4 and then also 2023? And then the second one is on the variable annuity book. So obviously, you're retaining the book in the near term, but it feels like you're not rolling out Q3 transactions just based on the growth of the underlying U.S. business and when you can reduce that, the impact of counterparty risk and the strategic costs. Just wondering, based on your projections today, how long do you think it will be before those 2 constraints are small enough that you might be able to consider a transaction for that book?
Yes. Thank you very much, Andrew. I'm going to ask Matt to do the capital generation and then thereafter, Duncan on the VA. So first, Matt, over to you.
Yes. Thanks, Andrew. So for the third quarter, the operating capital generation from the business units that we reported was EUR 399 million. We did have some, what we would call, unfavorable mortality and morbidity experience there in the amount of about EUR 41 million. But we did get a benefit in 2 main items. One was an alternative investment income was higher than what we had expected in the amount of about EUR 30 million. And then we had some favorable benefit from some seasonality in universal life reserving. And this was for an amount of about EUR 35 million. So we also had about EUR 25 million of good guys from international where we benefited from some lower required capital from just change in asset mix, together with some favorable claims experience. So if you net that all out, we end up with about a clean number for the quarter of about EUR 350 million.
So if you think about going forward for 2022, we have year-to-date reported EUR 1,175 million of operating capital generation in the business units, adding sort of a clean run rate of the EUR 350 million for the fourth quarter, and that gets you to something around EUR 1.5 billion. So that's an upgrade of the OCG guidance that we had given last quarter, which was around EUR 1.4 billion. Now we say it's about EUR 1.5 billion. So it looks like we're on a good track to be able to achieve that.
At this point in time, we're not giving any guidance on 2023, yet. We will do that in due course, likely in the fourth quarter as we work through those ones.
Thanks, Matt. So Duncan, the VA question?
Thanks, Andrew. Well, you're right to summarize that the 2 drivers -- the 2 main considerations for us were the counterparty exposure, given we don't have a separate legal entity. So any deal we would do would be in reinsurance fold. And the second one was the need to deal with stranded costs, which, of course, would be possible. But some of those costs will be fixed. And as you know, we are quite focused at this point in time in reinvigorating the growth engines within Transamerica. So that's our focus right now. In terms of the question in terms to the time line, we'll continue to evaluate things. Our work won't stop on this block of business. We've derisked it materially, and we have stabilized the capital generation coming out of it materially. But we're going to continue to look for incremental management actions as we have done in the past. Obviously, we're not going to look to transact in the very near term. But given that the policy count is running down between 8% and 10% per annum, both the items I identified in the coming years should become less relevant for us. And therefore, again, it could be an opportunity for us to reevaluate in the coming years.
We are now taking the next question. The question from Robin van den Broek from Mediobanca.
I'm sorry if I ask something you mentioned in your introductionary remarks but my line got cut off a few times. My first question is around the management actions in the U.S. I mean, clearly, it's raising your absolute level of RBC in the local units, but besides that, it's also reducing your volatility towards equity markets for the U.S. as a whole. So my guess is that, that should be quite remittance positive for the group. And I was wondering if you could give any commentary around that and also includes the potential for regular buybacks in that narrative? I mean we've heard what you had to say last week after the Aegon NL deal. So we can expect quite material buybacks after H1 next year, probably. I was just wondering how this management action could affect your decision taking there already at the Q4 stage? Then secondly, I think on the group ratio, you have some diversification benefits that dropped some Tier 3 eligibility issues. Did -- I mean, with the Dutch units coming out, I think the diversification benefits will probably drop further. So just wondering if that was already reflected in last week's guidance on your group Solvency II ratio. And in relation to that, should we even care about your group solvency ratio after the Dutch units basically has transferred? I guess the answer to the question is no, but I was just wondering about the reasoning. And maybe a follow-up question on the OCG bridge. I think last quarter, you did give guidance. I guess now you're not doing it because of all the deal uncertainty, and you just want to -- yes, better visibility on the variables. Is that the reason? Or are there other reasons to not give any guidance?
We did it for this year, but not for next year. Matt, over to you.
Yes. With respect to the management actions, you have it exactly right. So the Transamerica Life reviewed reinsurance deal will add about 30 percentage points to the RBC ratio and then we're effectively using 15 percentage points of that to fund voluntary reserves. So your question is that's got to be remittance positive. Well, it's certainly cash flow positive for the U.S. business, and that's the intention here is that we wanted to increase the solvency level of the U.S. but also to provide some level of funding for future growth, let's say.
And then if we get that growth, fantastic, that means we would have done our jobs and we would have written new business profitably. That's a good thing. If we don't get that growth, then we revert back to our normal capital management policy, where if we have excess capital sitting in the country units, then it comes up to the group. But for now we leave it in the U.S. With respect to the group ratio, yes, there was some small movement in the group solvency ratio. Yes, we lose a little a bit of diversification benefits, and there was some market movements but I think your main question related back to the announcement that we had previously done with respect to the ASR transaction. So when we telegraphed the group solvency ratio, it did, in fact, include the loss of diversification benefits that we would get into the group. So that's, I guess, the factual point. But as you had mentioned kind of in the last part of your question, indeed, the group solvency ratio becomes even less important than it has been. We really look at the capitalization within the main country units together with cash capital at the holding is really the way that we manage capital within the group.
When I talked about the OCG bridge, hopefully, that was clear to you that we've upgraded our guidance for 2022 to EUR 1.5 billion. But indeed, we just -- we have a lot of moving parts at this point, and we want to work that through before giving any guidance on 2023. It goes no deeper than that.
Yes. When it comes -- Robin, just to finalize your list of questions. When it comes to regular buybacks and buyback potential for the company, I think we've been quite clear about that last week. We -- in the context of the combination that we're going to create with ASR, the cash part of that consideration will come our way that we plan for a EUR 1.5 billion return of capital. Of course, we need to find a way to not make that's an -- there's an endless, let's say, time frame, and we'll navigate through that to make sure that we reduce the share count of the company with the EUR 1.5 billion that we allocated for that.
For the remainder, we have a stated policy, which is that we have a cash buffer that we want to maintain between EUR 0.5 billion and EUR 1.5 billion. Last week at the announcement of the ASR deal, we also said that we want to maintain that at a higher level because we want to do 2 things in the U.S. One is create profitable new growth and be able to fund that. And secondly, that we want to use also money for some additional management actions or in-force management actions that we may want to do in the U.S. to make sure that we are able to do that. But beyond that, anything that is in excess of what we need for the overall business plan, et cetera, has a very clear priority. And that is that, number one, it goes back to stockholders over time unless there is a value-creating opportunity in front of us, but the main priority is, I think, clear from that. With that, I think we've gone through your list. So back to the operator.
We are now taking our next question. The question from Cor Kluis from AAOB.
Cor Kluis of ABN AMRO. Two questions. First of all, on the VA business. You basically inject 15 percentage points money -- capital in that business to make it more stable. Can -- you mentioned this is positive probably on the long term for the free cash flow. What's the effect on the OCG or the capital generation of this transaction? And also related to this, are there more of such kind of transactions possible because it's a voluntary action. So is it possible that in a few quarters, you will add, again, EUR 300 million or something to make it even more stable? So that's on the VA part. Then other question that is also partly related to the ASR transaction when you basically swapped Aegon Nederland for a stake in ASR. What effect does that have on the debt structure because, of course, that's at the holding and not in the unit. So the unit structure, of course, changes as a result of this. Will that also, yes, have some consequences for the holding debt structure? We know, of course, you're going to reduce EUR 700 million, but you also have to bring debt to other countries and might that have an impact on the interest cost or other transactions? And maybe the last thing, Lard, that you just mentioned extra -- you want to keep some extra capital in the U.S. for extra management actions. Could you elaborate on what kind of things we have to think about? That's it from my side.
Thank you very much, Cor. The first three are going to be Matt and then the last one, Duncan, on the transactions in the U.S. So Matt, over to you for the first three.
Yes. Cor, thanks. So for the VA business, indeed, by setting up this voluntary reserve, we are reducing the RBC ratio by 15 percentage points obviously, more than made up by the TLB reinsurance transaction. It does have an impact on what we would expect for operating capital generation going forward. So you can think about it as EUR 50 million a year, round numbers, over the next couple of years. Importantly, that's not the reason why we did the transaction. We really want to set up that voluntary reserve mainly to stabilize the RBC ratio, not to inflate our OCG. That's not what we -- yes. So yes, Lard reminds me that the EUR 50 million OCG is indeed positive.
You also sort of tacked on to that question, is there an opportunity to do more of this sort of implying, are we going to move this around quarter-by-quarter? No. Actually, we have a mechanism to be able to accomplish this, which we don't want to touch for a number of years. This is not OCG management in any way. And we felt like that the level of voluntary reserves that we struck, combined with the benefit that we're getting from TLB, really optimizes the day 1 effect, operating capital generation and really risk management mainly on the RBC volatility. Your next question was with regards to, hey, does the ASR transaction change something with the structure of our debt stack? The short answer is probably not in the short term, something that we want to work out over time. Importantly, we did say that there was about a EUR 700 million reduction in leverage that we would expect or I should say, up to EUR 700 million, but that will be for, I think, another day to revisit that one. On the management actions, Duncan, do you want to cover those?
Yes. Not an awful lot to add, Cor, apart from -- we'll have to wait and see. I mean one of the key philosophies we've had since the Capital Markets Day 2 years ago is indeed to look for ways to improve net present value, particularly the financial assets. And as you're aware, over the last couple of years, we've taken quite a lot of action whether that's in the Netherlands or in the U.S. Just looking at the VA in isolation, we extended the dynamic hedging, we implemented a lump-sum buyout program, we increased the fees on several riders, we implemented a long-term volatility assumption to reduce further capital volatility. We increased the basket of indices within the hedge program to include NASDAQ to reduce further volatility, and now we announce the voluntary reserves. So just on that block of business, we've done an awful lot. That's before we take into account actually the long-term care and the life block. So we have a rhythm. We have a team in the U.S. and also in the Netherlands, and I'm confident that with that rhythm the team will find further actions in the future.
We are now taking our next question. The question is from David Barma from Exane.
The first I have is on the U.S. life segment, where you mentioned some higher persistency in parts of the portfolio. So we discussed that in the second quarter, I think and my understanding was that loss assumptions were very low. So the comments in today's release have an implications for reserving in the life book? That's my first question.
And the second one is on the Netherlands where you flag again today some realized losses linked to added sales to maintain the liquidity position. What's the absolute amount of assets year-to-date that have been needed to maintain the liquidity position? And also, could you help me understand the implications this could have on ALM and the rerisking potential in the near term?
Thank you, David. Matt, take both?
Yes. So I guess the first answer is pretty easy. We have been seeing low persistency and part of it, we think, due to COVID in fact, and no, it does not have any implications for reserving today. I think everyone knows that we do our review of assumptions in the U.S. in the second quarter of each year. We did so last quarter. So there's no need to adjust anything at this point. With regard to the liquidity issue that you raised, yes, so within -- I'd say, within the first 9 months of the year, we actually had to fund about EUR 8 billion worth of liquidity needs for collateral reasons. We do this through asset sales, in part. This is all part of our liquidity management strategy. So despite the fact that we had to fund a lot of liquidity during the first 9 months, we maintained very high cash liquidity buffers in the companies, and that's there to maintain our quite strong liquidity management policy, which we always try to remain -- always try to maintain at a level where we can withstand a 300 basis point increase in interest rates of that 1.5% immediate shock and then the other 1.5% over the course of 1 year. So this is -- although it has not been business as usual, obviously, given a rising rate environment that's come up so quickly, we do have plans for this, and we have dealt with it, I think, remarkably well.
The next question from Michael Huttner from Berenberg.
And I had three, I'm really sorry. The first one is, I think somewhere, but I'm not precise on this, there's an implication that half of the VA to be expected capital generation, I think, is right, it's to come the next 5 years. And I don't know what the figure is? I think it's about EUR 400 million? And then the other question -- the part of that is how much of the capital will still be there in the next 5 years? If EUR 1.1 billion, you add EUR 300 million, so EUR 1.4 billion. Will you also half the amount of capital allocated by -- in the next 5 years, is it going to step? Or does it kind of become a less attractive asset as it kind of matures?
And secondly, what is the cost of the reinsurance transaction with Bermuda? So is there a profit/loss in Bermuda, which I'm -- I now have to kind of deduct. In other words, you're getting EUR 50 million extra capital generation from this kind of move in the VA business, but is there a loss somewhere else, which I should account for?
And the last one is a question asking for reinsurance. So last week, I think one of your peers had a EUR 2.1 billion kind of, for me, surprised announcement, maybe not for others. And I think a big reduction in solvency due to lapses, which I think was a previous question. And I just wanted to kind of doubly confirm that I am correct that there's no risk like that at Aegon that your lapse assumptions are near 0?
Thank you very much, Michael. The first two will be done by Duncan, that's about the VA piece. And then I think the TLB and the last point you had will be done by Matt. Matt, maybe it's good if you start with those two last ones. Or you want to do the first -- okay, Duncan, start with the VA piece first and then the...
I think I got your question, Michael. And you're right. We think that roughly half the value of the VA block, and that is what the value will emerge in the next 5 years. And that's actually one of the considerations we had when we weighed up transaction and the complexity of that versus keeping it in that because the value is quite short term and its emergence, we felt that the keep scenario -- that had a similar waiting for keep scenario.
In terms of how it runs off, roughly, as I said, and I know it's roughly, there's a 10% reduction per annum in the policy count. So that runs off relatively stably per annum. What actually happens to the capital, obviously, is a bit sensitive to markets. So as markets go up over the period, that means that the capital runoff less rapidly than the policy count and if they don't then vice versa. So capital is a bit more nuanced because of the influence of markets, but the book is running off quite rapidly. And as I said, roughly half of value emerged in the first 5 years.
I'll take the next one. So this is on the cost of the reinsurance transaction between TLB and Transamerica Life Insurance Company, the legal entity in Iowa. So in general, from -- I think easiest to talk about it from an operating capital generation perspective. So this is sort of a left pocket, right pocket thing. So you can think of Transamerica Life Bermuda, operating cap gen will come down by EUR 30 million. U.S. operating cap gen will come up by about EUR 30 million, and it's a wash. Obviously, nothing is really happening economically, although the reinsurance transaction does allow us to release capital more quickly through this mechanism, which is part of the point in doing this. The other one that you had mentioned was that, yes, there was a company in the U.S. that had announced a significant charge as a result of revising lapse rate assumptions on secondary guarantee universal life contracts. And you are correct that it happened again in the second quarter. So we kind of say the same thing here. We are already operating under a granular lapse rate assumption, where for the secondary guarantee universal life business, the business is quite sensitive to lapses, specifically at the older ages, specifically with higher face amounts and specifically if they're -- we say, in money.
And in this case, we are -- we have, let's say, over age 80, which is a very sensitive group. We have lapse rates that are less than 1% for policies that are age 80 and over $1 million in face amount. Our lapse rate is 0.5%. And if they're in the money, in other words, no account value but remaining to pay premiums, which is particularly sensitive, we take 1/4 of these levels. So we are already at the most sensitive areas close to a 0 lapse rate. So this is something that we have taken care of over the years. And we continue to update it every second quarter if there are changes, then we make them, but we're already on quite a granular lapse rate assumption.
And just a reminder, how much is this -- any adjustments you made in Q2, how much it did cost back then?
The -- very small amount. It was a negligible amount really on our balance sheet on IFRS purposes. I think it was something in the order of maybe EUR 200 million or something in that space.
We are now taking our next question from Ashik Musaddi from Morgan Stanley.
Just a couple of questions I have. So first of all, is it possible to get the capital generation number or, say, cash flow numbers from TLB and VA business as to -- given that you know now you are keeping it and you know you would have much more visibility about the cash flows from this business in a [indiscernible]. So what is the cash flows from this business going forward every year? And I guess you already gave some color about how far -- what would be the decline pattern, et cetera. So that would be helpful. And secondly, I think, Matt, you mentioned that you will decide on when to upstream the cash -- the capital release from the TLB transaction once we have better visibility about whether the growth or investment in growth is required or not in the U.S. business. How long do you think we would need to wait to see that? I'm just trying to understand as to for how long will this capital be kept in the U.S. business? Or is there a possibility that, okay, we are talking about 2, 3 quarters and then take it out after that?
Yes, Ashik. So I think on both of these -- both of the questions that you asked, we will be able to provide some additional clarity at the Capital Markets Day that we intend to have in the first half of -- or actually in the second quarter of next year. But I can give you maybe some -- just some very basic information. Last year, OCG in TLB was around EUR 70 million. And again, as I had said, we would expect that to come down by EUR 30 million, and we would -- I feel like they come up by EUR 30 million. On the upstreaming cash if we're not getting the growth, when we would have visibility on that? Yes, we're working through our planning right now. Our strategic planning every year anticipates a certain level of growth and we'll have better visibility as we get into next year, and we'll update everybody at the Capital Markets Day in 2Q.
We take our next question. The next question is from Michele Ballatore from KBW.
Yes. So I have two questions. So the first question is, I think this is the second quarter in a row that you're able to, let's say, to capture surplus capital from other entities, so you did also in 2Q -- with a captive thing you did in the second quarter and this quarter again. I mean how many -- I don't know if you can give us an idea of how many pocket of surplus capital you still have that's not, for some reason, captured? So this is the first question. The second question is, clearly, with today's transaction, you have reduced the, let's say, the volatility on the fees component of your revenue for equity market, should you have a low volatility -- sorry, a low sensitivity to interest rates when it comes to capital. What are the -- what kind of volatility -- what kind of factors you are most, let's say, worried about when we talk about volatility on capital and on results at this point?
Thank you, Michele. Matt?
So on the first, how much more is there? How many other pockets of surplus capital do we have in any units? I think TLB was a very unique case. There, again, we had a transaction that we were thinking about potentially doing there. We recognized that, that was not the optimal way to go and then we go through a reinsurance solution. But in this case, we had flagged the idea of optimizing TLB either through some kind of a transaction or making it a financial asset as we have done. So I would say that is sort of a unique circumstance. I think more to the point, though, is what you are seeing is active capital management, especially on the financial assets. Duncan had rolled through earlier all the actions that we had taken in the U.S. with respect to the VA business, with respect to long-term care, with respect to the life block and we will continue to prosecute this. This is something that -- the fundamental part of our DNA is to maximize the value of those financial assets. On capital volatility, still the biggest area that we have for volatility of capital remains with the equity side of the balance sheet. So really, we took action within the -- we've just taken action to reduce the volatility going forward. We're establishing the voluntary reserve on the VA book. But that -- but we'd rather do that than to hedge the risk -- equity risk in the base fees. So on that point, that still remains the biggest area of sensitivity but you can see we've taken real actions here to reduce the level of sensitivity of our capital ratios to the financial markets. That's a fundamental part of what we're trying to achieve, make the quality of capital to be better over time.
We are now taking our next question. The question from Steven Haywood from HSBC.
Just two questions. You mentioned earlier about the liquidity, the EUR 8 billion of bond sales required to fund the collateral in the 9-month stage. Could you give a split of that between the U.S. and the Netherlands to help with what sort of hedging policies you have in place? And also could you tell us if there's any impact to your OCG or your operating earnings from the reduction in coupons from investment income from this debt bond? And then secondly, the EUR 400 million expense savings that you have, can you tell us how much of this is for the Dutch operations, please?
Over to you first on liquidity and the impact of OCG. Okay. I don't have it handy in front of me, the breakdown of the liquidity needs within the Netherlands versus the U.S., but it would be heavily weighted towards the Netherlands in this case. But we can come back to you with more detail on that. And in terms of the impact on OCG, it does vary. So in the case of sale of, let's say, corporate bonds, we end up with releasing required capital and that goes into OCG. However, we are losing, let's say, coupon income on that. So it is a bit of a mixed bag. It's not popping up as, let's say, in our over under OCG walk, it's not popping up on the, let's say, a delta.
The one thing I would mention in the Netherlands is that like in the life company today, we have seen an uptick in our run rate OCG. It currently stands at about EUR 260 million, which is an increase of about EUR 20 million from the last quarter but that's largely a consequence of a lower UFR drag that we have seen. So it's not a part -- it's not really part of the liquidity management. It's more of a consequence of the now higher interest rates.
Okay. When it comes to the questions about expenses, it's about 1/3, and that's in line with the size of the business that was in scope for the addressable spend base.
We are now taking one last question, is from the line of Nasib Ahmed from UBS.
Just two for me. First one is a clarification on the TLB transaction. Again, just looking at that transaction, the reinsurance transaction in isolation, you've released EUR 600 million of capital, but wouldn't that capital be coming off TLB over time anyway? So you're saying your OCG net-net is 0, it's left pocket, right pocket? But you really see it's an -- I mean so when I think about reinsurance transaction, it's kind of an acceleration of your capital generation. So just wondering at the group level, what's going on? Why is there no impact -- negative impact on OCG? Maybe it's the new business. I don't think you round off businesses there. So if you can just clarify that.
And then second point on sort of the debt caring impact on the group solvency number. Is that driven by higher interest rates? And do you expect that to kind of come back over the next quarter?
So Matt, can you take both?
Yes. So on the TLB reinsurance deals, so what I said is that the operating capital generation, there's sort of a flip between TLB and TLA for the U.S. business, 30-30. However, the reinsurance transaction, does allow us potentially to increase the level of remittances. So it creates, let's say, free cash flow more quickly than if we had left the business sitting in effectively and reviewed. So from that standpoint, that's why the transaction is appealing to us. That's what we do with financial assets, we try to accelerate the release of capital, and that's what this -- the reinsurance transaction will do.
On the debt tiering, we have seen the FCR come down from interest rates coming up and also through management actions. We've also seen that -- we have seen some DTA limitations in both the U.S. and in the Netherlands. But that's -- it's sort of a regulatory issue with respect to recognizing DTAs and available capital. So we still have those DTAs. We can recapture those from the various tax authorities, but that's the limitation that we're reflecting at this point. But it's sort of a noneconomic thing. Those DTAs are recoverable over time.
We have no further questions, and I will now turn the call back over to Jan Willem Weidema for closing remarks.
Thank you, operator, and once more, apologies to everyone for the technical issues that you have encountered. We conclude today's presentation and the Q&A session on behalf of Lard, Matt, Duncan and myself, I want to thank you for the interaction. If you have any remaining questions, then please reach out to us at Investor Relations, and we're happy to tell. Have a good day, and thank you for participating in the call.
That concludes the call for today. Thank you for participating. You may all disconnect.