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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good day, and welcome to the Aegon Q4 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, 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 fourth 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 of 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 look forward to updating you on our fourth quarter results. Matt Rider is also with me today, and he will walk you through the details of our results, our capital position and the actions we have taken to maximize the value of our financial assets. In my part of the presentation, I will take you through the strategic highlights and the progress we have made on our strategic assets in the last year. So let's turn to Slide #2. In the fourth quarter of 2021, we made good progress in achieving our financial and strategic commitments. And I'm encouraged to see this reflected in our results this quarter, but also when I look back at the full year. Our fourth quarter operating results decreased only slightly to EUR 470 million despite adverse claims experience, which was mainly driven by COVID-19. The result was supported by increased fees from higher equity markets and a positive contribution from business growth. Throughout the year, we maintained an intense organizational rhythm to realize our ambition to transform the company. To date, we have executed 844 out of 1,200 performance improvement initiatives with expense initiatives representing the majority. As a result, we remain on track to deliver on our $400 million expense savings target by 2023. We continue to invest in the expansion of our distribution network while simultaneously improving the digital experience for customers, advisers and employers. This resulted in solid growth in our U.S. Life business, record high asset balances in our Dutch mortgage and defined contribution businesses, and net deposits on the core U.K. platform turning positive. In Asset Management, we had our 10th consecutive year of positive third-party net deposits. However, there is still more work to be done, for example, in attracting more customers to our U.S. Retirement Plans business. In the fourth quarter, we again released capital on attractive terms through the extension of the lump-sum buyout program for certain variable annuities in the U.S. and the reinsurance of longevity risk in the Netherlands. We have also continued to improve our risk profile through a series of actions designed to reduce the volatility of mortality claims on a block of universal life policies in the United States. The capital ratios of all 3 of our main units ended the year above their respective operating levels, while the group Solvency II ratio stood at 211%. Active balance sheet management and enhanced performance has allowed the business units to increase remittances to the group, resulting in an increase in free cash flow. The stable growth in free cash flow allows us to grow our dividend. And therefore, we will propose a final dividend for 2021 of EUR 0.09 per common share at our 2022 AGM and bringing the full year dividend to EUR 0.17. Following our announced commitment to net zero carbon emissions for our general account investment portfolio, we updated our exclusion criteria in early 2022 to further align our investments with this commitment. We will continue to do this regularly to reflect the latest scientific findings on climate change in our investment approach. We've done a lot this year. But we knew that to be a company that delivers, we needed to also have people in positions with the right competencies, skills and the right mindset to do just that. With this in mind, we have made several changes to our management team in the past 18 months. The appointment of Deborah Waters as our new Chief Technology Officer; and Astrid Jäkel as our new Chief Risk Officer, complete the Management Board. Both appointments bring with them a wealth of experience and different perspectives that will further strengthen Aegon's strategic vision for the future. Lastly, we continue to work together with Vienna Insurance Group to close the divestment of our businesses in Central and Eastern Europe, which is still pending local regulatory approvals. As announced in December 2021, we have taken note of the fact that VIG and the Hungarian government are negotiating a potential 45% participation by the Hungarian State in Aegon's and VIG's insurance companies in the country. So let me now take a look back over the full year 2021 on Slide #3. 2021 was an important year for Aegon. We made considerable steps to improve our operational performance, reduce our risk profile and sharpen our strategic focus. Together with favorable markets, this has resulted in a strong delivery against the guidance we provided for 2021 at our Capital Markets Day. So let me take you through these 5 items one by one. We are targeting a reduction of our addressable expenses by EUR 400 million in 2023 and wanted to achieve half of this by the end of 2021. We are progressing well and have already achieved an expense reduction of EUR 244 million. On operating capital generation, we came in at EUR 1.4 billion, which is EUR 300 million ahead of our guidance as improvements in our operational performance and favorable equity markets more than offset the adverse mortality experience. More than 70% of that was remitted to the group, resulting in free cash flow of EUR 729 million, well above our guidance from the Capital Markets Day. As planned, we deployed about EUR 200 million to reduce leverage. And since mid-2020, we have reduced our gross financial leverage by EUR 700 million and now stands at EUR 5.9 billion. So this puts us on track to meet our target of reducing our gross financial leverage to EUR 5 billion to EUR 5.5 billion by 2023. At our Capital Markets Day, we guided for a muted near-term dividend growth. Since then, we've made steady progress on our strategic priorities and financial targets. And this allows us now for more linear growth of the dividend. And as a result, we increased the full year dividend by EUR 0.05 compared with the last year to EUR 0.17 per share. In summary, I'm very pleased with the progress we have made over the last year. So let me show you where we stand with the execution of our operating plan on Slide #4. Our ambitious plan, which now comprises of more than 1,200 detailed initiatives is designed to improve our operating performance. More than 840 initiatives have now been fully implemented. In the fourth quarter, we completed over 150 initiatives. This underscores that we are transforming Aegon and that we're doing this at pace, maintaining an intense execution rhythm. At this point, we have implemented more than 70% of the original 1,100 initiatives embedded in our operational improvement plan. Expense initiatives alone contributed EUR 244 million to the operating results in 2021. Additionally, growth initiatives aimed at improving customer service and enhancing user experience and launching new innovative products are well underway, contributing EUR 115 million to the operating result of EUR 221 million. So let's turn to Slide 5 to discuss the progress we have made with respect to our strategic assets. Let me remind you that our priority here is to grow the customer base and expand our margins. And I want to take this opportunity to look back on the full year of 2021 and demonstrate the progress we have made since our Capital Markets Day. In U.S. Individual Solutions, we have the ambition to regain a top 5 position in selected life products over the coming years. Last year, new life sales improved by 19% compared with the full year 2020, mainly driven by indexed universal life and whole life final expense products. We've extended our market share in the distribution channel, World Financial Group, and strengthened the distribution capacity of this channel by adding 6% more licensed agents over the course of 2021. Sales in World Financial Group are especially benefiting from a funeral planning benefit available for eligible indexed universal life policyholders. Whole Life final expense sales also increased compared with 2020, 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 new middle market sales. This business continued to build momentum with the sixth consecutive quarter of written sales over USD 1 billion. And in 2021, written sales were in aggregate, 1/3 higher than in 2020. Assets under administration in the middle market segment grew by 12% during 2021 to more than USD 50 billion, which was supported by favorable markets. The improved sales momentum helped reduce the net outflows for the full year. However, we recognize that we have more work to do here. So let's turn to our Dutch strategic assets on Slide #6. We are leaders in both mortgage origination and new style defined benefit -- sorry, defined contribution pensions. We saw a continued growth in these businesses throughout the year. Mortgage sales amounted to around EUR 11 billion, similar to 2020 as we continue to benefit from our strong origination capabilities. About 2/3 of the origination volume consisted of mortgages intended for third-party investors through our Dutch mortgage funds on which we earn a fee. In our workplace business, we maintained a high level of net deposits for low-cost defined contribution products. Assets under management for this business surpassed the EUR 6 billion mark at the end of the year, underscoring Aegon's leading position in this market. The strategy for our online bank, Knab, is to develop it into additional gateway for individual retirement solutions. In 2021, Knab grew its customer base by nearly 17,000 customers. The growth rate was somewhat lower than last year, stemming from our decision to stop offering savings products to non-fee paying customers as these were loss-making. Moving on to the United Kingdom. Assets under administration increased to nearly GBP 215 billion at the end of the year. Over the year, net deposits improved in the workplace and retail business, reflecting stronger investor sentiment as well as the benefits from ongoing investments in the business. Expense savings initiatives and the impact from favorable markets on assets led to an improvement in the efficiency of the platform. This more than offset the revenues lost from the gradual runoff of the traditional portfolio. Let me now turn to our Global Asset Management in the growth markets on Slide #7. Our Asset Management business celebrated its tenth consecutive year of positive third-party net deposits. In 2021, both our global platforms and strategic partnerships contributed positively. Global platforms achieved EUR 5 billion of net deposits in 2021, a significant improvement versus 2020. The operating margin of global platforms improved by 2 almost percentage points over the year to nearly 13%. This was driven by higher revenues as a result of favorable markets and net deposits. Our strategic partnerships continue to perform very well. Higher management fees from continued net deposits and favorable equity markets drove the operating result up to EUR 199 million for the year, which represents now more than 10% of the group's overall results. In Aegon's growth markets, we continue to invest in profitable growth. New life sales increased by 4% over the year to EUR 250 million, with successful growth in the bancassurance channel in Spain and Brazil being partly offset by somewhat lower sales in China. This was 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 107 million in 2021 as a result of sales of new products in Spain and Portugal. We continue to see benefits from the redesign of our digital sales channels through our Spanish bancassurance partners. In summary, we are progressing well on our strategic priorities. We have demonstrated solid growth in our strategic assets and growth markets in the last year, and 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'd like to hand it over to Matt, who will talk about the financial results and update you on our actions regarding financial assets. Matt, over to you.
Thanks, Lard, and good morning, everyone. Let me start with an overview of our financial performance over the last year on Slide 9. On the back of the EUR 244 million in expense savings achieved so far, our operating result increased by 11% to EUR 1.9 billion. This was helped by increased fees from higher equity markets and positive contributions from business growth. These were only partially offset by adverse claims experience in the U.S. mainly attributable to COVID-19. Cash capital at the holding increased to EUR 1.3 billion on the back of more than EUR 1 billion of gross remittances from the business units to the holding this year. Remittances were partly supported by the distribution of excess capital from several units, which brought us free cash flow for the year to EUR 729 million. Since mid-2020, we have reduced our gross financial leverage by EUR 700 million and now stand at EUR 5.9 billion. This puts us on track to meet our target of reducing our gross financial leverage to between EUR 5 billion and EUR 5.5 billion by 2023. Our balance sheet remains strong with the capital positions of all 3 of our main units above their respective operating levels at the end of the year. Group Solvency II ratio increased by 15 percentage points during 2021 to 211%. Over the year, we have actively managed our risks and our capital position. In the U.S., we have nearly completed the interest rate reduction plan. We have also extended the dynamic hedging program to cover the entirety of our legacy variable annuity program. Furthermore, we have completed the lump-sum buyout program for certain variable annuities, reducing risk and doing so at both favorable terms to customers and shareholders. And we have seen continued success in our long-term care rate increase program. Last quarter, we indicated that we wanted to tame the volatility for mortality experience in the U.S. In the meantime, we have taken a number of actions, including reinsuring a portfolio of universal life secondary guarantee policies to Wilton Re. In the Netherlands, we have reinsured additional longevity risk and have increased the predictability of remittances. Let me turn to Slide 10 now to go into more detail on the expense savings. Addressable expenses in 2021 reduced by EUR 217 million compared with 2019. EUR 244 million of these savings were driven by expense initiatives that are part of our operational improvement plan. This level of expense savings is comparable to what we had achieved in the last quarter. The benefit of the additional expense savings initiatives implemented this quarter was offset by exceptional expenses related to performance-based employee expenses and investments in technology. Our progress makes us confident that we will be able to achieve our expense savings target of EUR 400 million by 2023. 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 pressure on expenses. In addition, some of the larger initiatives are still in progress and will take some time to fully execute. Next to the expense savings, we benefited again from somewhat lower travel and marketing expenses due to the impact of the COVID-19 pandemic. These benefits have started to fall considerably compared with previous quarters and we expect them to go to 0 over time. Through the growth initiatives that we are implementing, we aim to profitably grow our business by improving customer service, enhancing user experience and launching new innovative products. These initiatives resulted in EUR 44 million of expenses in 2021 and have contributed about EUR 115 million to the operating result for the year. Let me now turn to Slide 11. In the fourth quarter of 2021, our operating result amounted to EUR 470 million, a decrease of 2% compared with the same period last year. The apples-to-apples decrease is actually 1% at constant currencies and adjusted for the reclassification of the operating result of our Central and Eastern European businesses to other income. The decrease in the operating result was driven by the U.S., which was negatively impacted by adverse claims experience, exceptional expenses and lower fee revenues from expected outflows in variable annuities. This was partly offset by higher fee income from favorable market performance. U.S. adverse mortality experience amounted to EUR 83 million. Deaths that were attributable directly to COVID-19 were broadly in line with our expectations relative to U.S. population deaths. The remaining mortality experience can mainly be attributed to higher claims frequency in universal life, which we believe to be in part directly -- indirectly related to COVID-19. The adverse mortality experience was partly offset by EUR 30 million of favorable morbidity experience in the long-term care book, which included an EUR 11 million release of the incurred but not reported reserve. In the Netherlands, the operating result increased by 16% to EUR 195 million, supported by the benefits of expense savings and business growth. All lines of business contributed to the higher results. In the U.K., the operating result increased by 53% to EUR 49 million, driven by higher fee revenues as a consequence of favorable equity markets and a provision release.The operating results from International increased by 23% to EUR 48 million. On an apples-to-apples basis and again at constant currencies, the operating result almost doubled as a result of business growth and favorable claims experienced across the different businesses. Finally, the operating result from Asset Management decreased by 8% to EUR 49 million. Higher management fees driven by net deposits and favorable market movements were more than offset by accruals of performance-related compensation as well as lower disposition and performance fees compared to the exceptional level of last year. Let's now turn from operating results to net results on the next slide. As we can see on Slide 12, our net result for the fourth quarter of 2021 amounted to EUR 526 million, which was driven by the operating results. Nonoperating items amounted to a gain of EUR 226 million. Fair value items contributed EUR 90 million, largely driven by positive private equity and real estate revaluations in the Americas and in the Netherlands. Realized gains on investments, mainly from mortgages and bond investments and net recoveries contributed EUR 121 million and EUR 15 million, respectively. Other charges of EUR 69 million were largely driven by a EUR 133 million charge for model and assumption updates in the Netherlands. This resulted from a more granular modeling following the transfer of defined benefit pension administration to TKP. Onetime investments related to the operational improvement plan amounted to EUR 81 million. These charges were partly offset by gains, including from a onetime benefit due to changes to the U.S. employee pension plan. I now turn 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. U.S. RBC ratio decreased by 20 percentage points during the quarter to 426%. The RBC ratio was adversely affected by the expected regulatory updates to required capital factors for investments and the actions we have taken to reduce mortality risk, including a mortality reinsurance transaction. Remittances to the group were offset by favorable market movements and the capital release from the lump-sum buyout program. In the Netherlands, the Solvency II ratio of the Dutch Life unit increased by 14 percentage points to 186%. The increase mainly reflects the longevity transaction as announced in December 2021, which significantly reduced required capital. Additionally, markets and model and assumption changes had a positive impact. The latter included a higher factor applied when calculating the loss absorbing capacity of deferred taxes. These were offset by an item related to profit sharing on group pension contracts. During the year, the profit sharing that had been accrued but not yet locked in, was available to absorb adverse market movements and led to an SCR benefit. At the end of the year, when the profit sharing was locked in, this SCR benefit went to 0. Under normal circumstances, this leads to very minor impacts. But this year's favorable markets have amplified the impact. We are considering actions to address this potential volatility in the SCR caused by profit sharing. Operating capital generation had a positive impact, which more than offset the remittance to the group in this quarter. The solvency ratio of Scottish Equitable, our main legal entity in the U.K., decreased to 167%. Remittances more than offset the positive impact from derisking of the own employee pension plan and operating capital generation. Let us now turn to the development of cash capital at the holding on the next slide. Cash capital at the holding increased to EUR 1.3 billion at the end of the year, which is in the upper half of the operating range. In 2021, we received more than EUR 1 billion of gross remittances from the units, about half of which came in the fourth quarter. The gross remittances for 2021 included more than EUR 200 million of distributions of excess capital, mainly from the U.K., the Dutch Bank and TLB. Total remittances from the business units translated into EUR 729 million of free cash flow for the year. Approximately EUR 500 million of this amount has been used to return capital to shareholders and to reduce leverage. Let me now turn to our financial assets on Slide 15. I'll start with the actions we have taken to maximize the value of our U.S. Variable Annuities business. One of them is the lump-sum buyout program that was launched back in July. The program has reduced Transamerica's economic exposure at favorable terms, thereby reducing hedging costs for the portfolio of Variable Annuities with guaranteed minimum income benefit riders. At the end of the year, 16% of customers who received an offer had accepted it. The program concluded at the end of January 2022, with a total of 18% of customers accepting the offer. Furthermore, 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 hedge program that we have operated with policies with guaranteed minimum withdrawal benefits. Both programs achieved a satisfactory hedge effectiveness of more than 90% in the fourth quarter. Having now completed the significant management actions relating to the U.S. Variable Annuities portfolio, Aegon has allocated internal resources to investigate potential third-party solutions. We will update the market on our considerations regarding these potential solutions when we release our first quarter 2022 results. Let us now go to Slide 16. We have progressed well on the in-force management of our long-term care book. In the fourth quarter of 2021, Transamerica obtained regulatory approvals for additional rate increases of USD 32 million, bringing the value of approvals achieved in 2021 to USD 342 million. This means that we have achieved 76% of the USD 450 million rate increases that we are now targeting. Long-term care claims for the fourth quarter came in at an actual to expected ratio of 77%. The level of new claims is trending back to pre-pandemic levels. The claims experience reflects a USD 13 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 experience for the fourth quarter of 2021 would have amounted to 87%, 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 fourth quarter in line with its quarterly remittance policy. The Solvency II capital ratio of the Dutch Life business increased by 14 percentage points to 186% and was again above its operating level. The increase in the Solvency II ratio in the fourth quarter was driven by the reinsurance of longevity exposure with a benefit of 15 percentage points on the Dutch Life solvency ratio. The reinsurance agreement provides protection against the longevity risk associated with EUR 7 billion of pension liabilities. Together with previous agreements, we have now reinsured 40% of our longevity risk exposure in the Netherlands. These protect us against the potential adverse financial impact of longevity risk over the full life of the policies at an attractive cost of capital. Furthermore, we expect to release the regular remittances to the Dutch Life business from EUR 25 million per quarter in 2021 to EUR 50 million per quarter, starting in the first quarter of 2022. This follows management actions taken over the past year to strengthen the capital position, improve the risk profile and increase capital generation. Let's now turn to our outlook for 2022 on Slide 18. Looking ahead to 2022, we will continue to make progress in delivering on our strategic objectives and our 2023 financial targets. First of all, we will continue to push ahead with our expense savings program to achieve our target of EUR 400 million of expense savings by 2023 compared to the base year of 2019. The actions we have taken to improve our performance provide us with confidence that we will deliver around EUR 1.2 billion for 2022 based on current market conditions. This reflects the impact of the actions that we have taken to both release capital and to improve our risk profile, therefore, improving the quality of our capital generation. You should think of things like the extension of the dynamic hedging program to the legacy Variable Annuities book and the derisking of the employee pension plan in the U.S. as well as the additional reinsurance of longevity risk in the Netherlands. Furthermore, we have taken into account the impact of low interest rates on reinvestment yields and have assumed adverse claims experience of around EUR 150 million driven by COVID-19. While it is difficult to make predictions, we have assumed around 300,000 U.S. population deaths directly and indirectly attributable to COVID leveraging forecast from the various health organizations. The actions we have taken to improve our performance allow us to increase our 2022 free cash flow expectations to between EUR 550 million and EUR 600 million. This is an increase of EUR 100 million compared with the outlook that we gave at the Capital Markets Day. We reiterate our commitment to reduce our gross financial leverage to between EUR 5 billion and EUR 5.5 billion by 2023, while we continue to benefit from the low coupons that our current securities provide. Supported by the progression we have made so far, we expect more linear growth of dividends instead of the muted near-term growth outlook provided at the 2020 Capital Markets Day, on our path to pay around EUR 0.25 per common share over 2023. With that, I pass it back to you, Lard, for the closing.
Thank you, Matt. Slide #20 is a takeaway from today's presentation is that we are making steady progress in achieving our financial and strategic commitments. And I want to take this moment to also thank our employees, who throughout 2021, have worked tirelessly to progress towards our goals. And encouraged by the progress this year, we are fully energized to continue our transformation journey in 2022. I would now like to open the call for your questions. [Operator Instructions] Operator, please open the Q&A session.
[Operator Instructions] We will now take our first question from Andrew Baker from Citi.
So the first one is on your EUR 1.2 billion capital generation outlook for 2022. So if I annualize the EUR 400 million normalized quarterly cap gen that you referenced at 3Q and then deduct the EUR 150 million for the COVID claims, gets me to about EUR 1.45 billion. So just hoping you could help me bridge back down to the EUR 1.2 billion that you're referencing? And then the second one is on cash conversion. So for 2022, if I look at your guidance, it looks like the cash conversion is around 60% or so. So free cash flow divided by operating capital generation after holding company costs. So I'm just wondering when you expect this conversion rate to increase what you need to do to sort of close this gap.
Okay. Thanks for your question. I'm going to try to walk you through the sort of how we get to the $1.2 billion guidance for the 2022 operating cap gen. So I think it's easiest for us to start from the actual operating cap gen before holding in funding expenses for 2021, and that came in at about EUR 1.425 billion. So let's begin there. Next thing you have to do is adjust for the variety of management actions that we have taken over the course of 2021. So this would be -- these would include the, I'll say, the longevity reinsurance deal that we did in the Netherlands. We did the VA hedging and the ALSO program in the U.S. We've taken some actions to reduce mortality risk. We've done a little bit of pension derisking in the United States. And if you think about all those actions combined -- if you think about a reduction of operating capital generation of about EUR 150 million, about. The next thing you have to do is kind of think a little bit about, okay, what -- let's think about the puts and takes for COVID mortality and generally excess mortality over the course of 2021 versus what we expect for 2022. And here, if you do the math on it, if you sort of deduct the 2021 adverse claims experience in the U.S., it's about EUR 125 million. And we're signaling today that we would expect something like EUR 150 million back in 2022. Once you add in sort of, let's say, the drag from lower reinvestment yields that we would expect because interest rates still are at low levels, then you get to around that EUR 1.2 billion level. I think that can -- there are many, many different ways to bridge this when I recognize yours. If we want to go into a little bit more detail, I can get you to contact Investor Relations, and they'll walk you through the puts and takes. Let's -- so on the free cash flow outlook for 2022, probably the best place to start is, again, as I mentioned in the opening presentation, just big numbers. We started off with free cash flow generation in 2021 of about EUR 700 million, and that was a lot. Let's say, that there was EUR 200 million or so of excess capital distributions that we got primarily, again, from the U.K. business, we got some from TLB, we got some from the bank. So if you ducked about EUR 500 million from that versus EUR 200 million, you get to about EUR 500 million. And at this point, we are looking at cash flow guidance of -- for 2022 for free cash flow of something between EUR 550 million to EUR 600 million. Now the thing that -- an important one is this does assume some impairments, credit impairments, even above our long-term expectations. We need -- you saw in the opening remarks here that we had net recoveries in this very strange credit environment. Our long-run expectation is that we would get something like $100 million or so, something in that space of long-term credit impairments. We've assumed about $150 million, which is an important one for upcoming in 2022. So I think that should pretty much answer your question. I think one of the things you looked at what will help us to improve the free cash flow sort of over the operating capital generation. I think as we -- so a couple of things are happening, we do need to take into account the fact that we are investing heavily in the operating or operational improvement plans across all of our business units. And to the extent that -- and that is not a drain necessarily from operating cap gen, but it reduced -- effectively reduces the amount of remittances in part that we can take from the business units. So once 2 things happen, one is that we're stopping to make investments in that operational improvement plan. But very importantly, we expect to see benefits of this plan. So as you look forward, we would expect to see improvements coming out of that plan. So it is a little bit of a -- in terms of that free cash flow, it's a bit of a double whammy on the upside. I hope that answers your question. It was quite long-winded.
We will now take our next question from David Barma from BNP Paribas.
On -- so my first question is on the actions taken on the U.S. universal life book. Can you help us put those -- the few numbers you gave on the mortality reinsurance in the context of the risk associated with that block of business, please? And also, do you think this could ultimately make third-party options possible, at least for part of the universal life block with secondary guarantees? That's my first question. And then secondly, coming back to cash. Can you remind us what the requirements are for excess cash distribution from unit? And at what point would you consider the Dutch life book to be there?
Okay. So maybe first on the actions that taken to reduce mortality risk. We've done a couple of things. The first is the reinsurance transaction with Wilton Re that I think you're referencing. This is a book of high-face amount, secondary guarantee universal life contracts. And some of that book is related to what's called stranger-owned life insurance contracts, which are basically owned by institutional investors. So what we've done -- I think the numbers that we've given you are that we take a 12 percentage point hit to the RBC ratio. But important to note that about half of that is related to another transaction that we're in the process -- or have funded, let's say, in the fourth quarter. And that relates to another program where we are planning on buying back from those -- from institutional investors, a portion of that stranger-owned life insurance contract, STOLI contracts. So of the 12 percentage points on the RBC ratio, about half of that is coming from that, let's say, prefunding of the STOLI transaction. So what does that do for us? So on the straight reinsurance transaction with Wilton Re, we got rid of some STOLI exposure. We get rid of some high face amount exposure on mortality. But importantly, and I think you've seen this over the quarters with Aegon and Transamerica in particular, you do get mortality fluctuation as a consequence of these high face amount contracts. So the idea is we're doing this to be able to tame some of that volatility. Just to put it in perspective, for the deal with Wilton Re, I think it's about we have maybe a $42 billion face amount book of Universal Life with second year -- secondary guarantees. We've done about, let's say, only 9%, only 9% in the reinsurance transaction, but it is -- I think it's a good start. I think that it does demonstrate that we are looking to always take good management actions to the extent that we can do so at a reasonable cost of capital and minimize -- try to make -- try to minimize some of the volatility that we see in our earnings, improve the quality of the capital generation and earnings, and we're willing to make those trade-offs. The second part of your question related to does this opens the door for third-party transactions? I think this is not a place where we would -- it doesn't open that door, I would think about it in terms of other management actions, but not -- I would say not big things. I think the third -- the second point that you had asked for was, what's the requirement for distributing excess cash out of the business units? So in our capital management policy, I think, we've articulated this well is we have an operating level for each of the business units, but we have not been specific about the extent of the solvency ratio at which we would say, okay, at that definite point then we're going to take out excess capital? No. We don't do it that way. We think about what's the position today, what is the outlook? What do we need to do to fund, for example, the operating improvement plan? We always take these decisions on kind of a management basis on our best expectations at the time. But you can see that it is a bit of a -- it's a fight to extract capital. That's the way that we like it. So that we are always looking for ways to get capital out of the businesses to the extent that we don't think that they need it. I don't think that there's a particular read-through. I think you mentioned specifically the Dutch Life book, they're sitting at 186%, they're in good shape, everybody is good. And the idea here is that we want them to be a predictable dividend payer. I'm not interested. I don't think we are interested in getting giant excess capital out of the Netherlands. But we did take that step to increase the dividends or the remittances out of the unit from EUR 25 million to EUR 50 million. So that's -- and you'll actually see in terms of their capital generation and free cash flow, they were remitting a lot of that money, but we do that by design. We want that one to be very predictable.
We will now take our next question from Michael Huttner from Berenberg.
Fantastic. And thank you for all these numbers. I have 2 questions. The first one is your cash is now at the top end or the top half of your target range. And you're raising your free cash flows, but there's going to be more coming, the dividend didn't actually cost that much. What's the plan for this cash, particularly if at some stage, the Vienna Insurance disposal does get ahead? The second is can you just go back on that U.S. mortality. So my understanding is -- well, my understanding is confused. I'm really sorry. I know you explained it but I'm not -- I'm simply really slow. The -- you did a deal funded by funds, I don't know how that impacts the earnings which reduces -- presumably reduces the cost of mortality, but you're still saying mortality will be higher in 2022 than 2021. I don't get the benefit of the reinsurance deal. How come? If you could maybe address that, it would be helpful.
Yes, Michael, so this is Lard. Let me start with the first question about cash capital. And then Matt, can you then expand on the U.S. mortality. So we have -- we were pleased that the capital position has developed the way it has done. We're now EUR 1.3 billion in the cash buffer in the holding company. We want to keep -- as you know, we have a clear policy for that. We want to keep the cash buffer for the holding company between EUR 0.5 billion to EUR 1.5 billion. And with 1.3 billion were indeed at the higher end of our cash capital buffer. And the way we look at that is we give quite clear guidance on the Capital Markets Day on how we think about that. We want to ensure that in this, let's say, large-scale strategic, financial, operational and cultural transformation of Aegon, we are able to do that program and to implement that program well and that informs us to have the financial flexibility to do so. That's one thing. Secondly, we also have a leverage reduction target. And you get to EUR 5 billion to EUR 5.5 billion leverage position, we are currently at EUR 5.9 billion. So there's still work to be done there. And for the remainder, we said any excess -- any cash that we would have that we do not need for the implementation of our plans and keeps us in a good stead, also looking at macroeconomic developments at markets and taking everything into account, has a clear priority. And that is that if it's -- that goes back to stockholders in the form of dividends or buybacks at the time that we believe that is appropriate. So that's our policy, and that is how we intend to behave. On U.S. mortality?
Yes. So one thing on the deal with Wilton Re and reinsurance in general, one of the main roles of reinsurance is to reduce the amount of volatility that we have in our claims. So you could have a management best estimate for what your mortality is, but it could come in very lumpy and we've actually seen that in the past quarters. And we have -- and part of it is due to very large face-amount contracts. And again, part of it stranger owned or owned by investors. So the goal of the reinsurance is to really smooth that out over time. But again, to stabilize our earnings and capital generation over time. So that's the first one. The second one is that the increase in the, let's say, the excess claims expectation is simply a consequence of COVID. I mean we are expecting at this point in 2022, something like 300,000 U.S. population deaths for -- related to COVID-19. And it's quite a staggering number relative to where we are today. So it's just -- it's a COVID effect.
I understand -- my question is if you reinsure and it costs you and you still have higher cost, I don't get -- I don't understand it. It sounds as if it's all negative, it's not offset anywhere from the reinsurance. It's like you're paying money for nothing. I'm exaggerating here, of course. So I'm trying to explain why I'm still confused.
No, I think so. But so let's take it to maybe piece by piece. So we have like COVID claims, right? So we have an increased expectation for mortality going into 2022. We do get reinsurance offsets from that. We are getting the benefit from those excess claims through reinsurance that we have on our total book of business. I think the difference is that on the new -- on this newest reinsurance deal that we've done, the idea is that we want to, again, tame the volatility in the claims experience, and that tames the earnings and the capital generation. That's why we've done it.
We will now take the next question from Farooq Hanif from JPMorgan.
And thanks for some really great improvements here in the results. Two questions. Firstly, on inflation risk. So qualitatively, I know that a large proportion of your life book is fixed, is nominal. But are there any areas where there is an inflation linkage, how is that hedged? And then what's the impact on your liabilities from higher wage inflation and salary inflation and cost inflation. So just the whole inflation topic and how well hedged do you feel about that? And then secondly going to the U.S. Retirement book. Can you sort of give us maybe an outlook for when you think certainly the larger plan kind of segment that you'll start to see a tempering of those net outflows and kind of what you're seeing when you talk to your customers there? And also the ramping up of the middle market and the smaller schemes, when -- I mean, do you think 2022 is the transition year? Or do you think we'll start to see some fruit?
Maybe I take the first one on the inflation risk. So you asked specifically, to what extent do we have contracts that have inflation-linked elements to them. This is largely, largely, largely sitting in the Dutch book. So we have pension contracts that could have indexed pension benefits. And on the pension benefits, we have -- we fully hedge that for the expectation -- for the inflation expectation elements in it. Now there's another part to the Dutch Life book, and that is the we do build in an expectation for, let's say, maintenance expenses in our management best estimate of expenses, which includes inflation. And that's part of the best estimate liability that we come up with. And there, we also have hedging in place. We'd actually expanded it in the first couple of weeks of October last year to include that. So really, on the Dutch book of business where there's contract links to inflation, we have basically full hedging in place for that. In other areas of the world, we are subject to inflation risk just on -- just the normal wage inflation, those sorts of things. It shows up in the U.S. and in the U.K. In the U.S., it's a special situation in that we have a long-term care book where you can end up with inflating cost of long-term care. But there, we have caps with respect to maximum daily benefits and maximum policy benefits, which make it so that if there is a lot of inflation that it ends up going for the account of the customer rather than the company. And I always have to remark on this one that with respect to the long-term care, we always say these -- that we're doing these premium rate increase programs. We do actually give the customers different options for this. So they can -- instead of paying the increased premium on the full amount of the contract, they also have the option to reduce the benefit and then that reduces our risk, obviously, on inflation. And like -- I think Lard had mentioned that earlier that any time you have inflation that is accompanied by rising interest rates, that's a different proposition in that. Then on capital generation, we start to show some improvements. And for example, reinvestment rates on the amounts that we reinvest all over the world and particularly in the U.S. And it's -- so if it's accompanied by higher levels of interest rates that we can benefit from that.
Yes. Thanks. And I'll take the mid-markets and the U.S. Retirement book. So what we're focusing in the U.S. is really on the mid-market because we believe -- and let me remind you that we believe that we can, number one, have a capability there that we want to expand. Number two, that we are able to extract higher margins and command a better pricing position than we could do to go in the large markets. So while we play in the large-scale market, we really focus on the mid-market. And actually, we're seeing very good momentum in written sales. I mean, 33% up for the year, full year. That's a pretty impressive number. And that is a clear, let's say, a result of the improved focus and capabilities that we have built and that we're leveraging on. So that's really good. Now there is a time lag though, so you can write these new sales, but before the asset balances really all these new plants come into your books, there's a time lag. So that's the first thing you need to bear in mind. The second one is that we indeed saw withdrawals and the increase in withdrawals were driven by the increase in equity markets, which led to a higher dollar amount of withdrawals, but the rate of the withdrawals remained stable. So the rate of withdrawals remain stable, didn't get worse. It's more that the balances that you transfer out are increased because of equity markets lifting those account balances. So on the gross deposit side, roughly half of the inflows are driven by contributions that are mainly wage growth and do not benefit from the increase in equity markets in recent years. So that's another effect that I think you need to take into account. Now when will that dynamic turn? Well, we've now seen quite a number of quarters where we have more than 1 billion written sales. So if we continue this progress, at a certain point, that will flip, let's say, the total net flows will flip in the right way. There's not an exact timing for that because it depends again on how fast the plans that are leaving us, the amounts are transferred off your P&L in your balance sheet and where the written new sales are coming in. So there's just a time lag there. But over the time, that needs to flip as we continue our progress in selling these plans.
We will now take our next question from Steven Haywood, HSBC.
Did you mention on the call that you would update us about third-party solutions for your VA book and the first quarter results stage. Is that correct? And what kind of solutions are you investigating on that? And secondly, I think you mentioned this earlier about being Solvency II ratio of each unit is above your operating level, but you're not willing to upstream excess capital out of these units currently to reach that operating level due to your -- the near-term view of the markets and the capital required in this business. Is there any point in time that you think there might be more excess capital to be up streamed from the business units rather than the regular recurring upstream?
Yes. So first -- Steven, this is Lard. First, the -- I'll take the first one and Matt, maybe you can take the second one. First one, on the VA book. Indeed, we will give an update on that in Q1. Last time, we said that we would come back to you in the first half of 2022. And we've now made that more precise to say that we will do that during the Q1 update. As we said last year, we focused -- so we have a framework, right, in which we look at the financial assets. We -- there's the unilateral transaction -- unilateral -- not transactions, but unilateral actions that we can take. An example of that is the expansion of the hedge program, the dynamic hedge program, which we have implemented in the back end of last year. We have also what we call bilateral actions, and those are actions where we cannot only decide ourselves, but also need regulators to approve it. An example of that would be the long-term care rate increase program for which we need approval from various regulators. And we are, as Matt mentioned on the call, well on our way versus our target for those rate increases. That's an example of that. And then the third concept that we use is exploring third-party transactions. And we have said last time with respect to the VA book, that our focus was really on getting the dynamic hedge in place and focusing on the ALSO program, which we've now successfully concluded with an 18% take rate and that we would deploy resources and relocate that now to investigate what are we thinking about that large book? How are we going to act. We're going to give you an update at the Q1. I think Duncan Russell at the time gave an overview of many considerations that we take into account. So we cannot say anything at this point in time, we're still doing the work and we will update you in Q1 -- at the Q1 results. So Matt, maybe over to you on the upstream point.
Yes. So I think on your second question, one thing to be very clear, I think this quarter actually shows that we are perfectly willing and able to upstream excess capital out of business units if we can do it, right? So the U.K., the Netherlands Bank and the TLB, so we're showing that we are able to do that. I think your question is at what point would we be able to do even more.With the Netherlands, I would say, at this point, focus -- full focus is really on get them to be a regular dividend payer. That's why we upped our remittance target by 100% in the -- for 2022. And in the U.S., let's also recognize that there are some potential headwinds we don't know. Coming out of the COVID environment, are there going to be credit implications? Are they going to be equity market implications. We know we still need to fund the operating improvement plans. But most importantly, you do want to operate the U.S. to a level where we can invest in organic commercial growth. This is, of course, a giant strategic asset for us, and we are perfectly willing to invest in that business through new business strain as long as it's profitable new business group.
We will now take our next question from Robin van den Broek from Mediobanca.
First one is on OCG. I appreciate everything that's been said on 2022. But I was wondering if you're willing to think a little bit more about 2023 considering stable equity markets, what the outlook could be there? And also, what kind of remittance ratio we might see for that specific year? And I'm asking because I think your free cash flow update today is sort of pointing to a cumulative delivery of EUR 2 billion, assuming a stale delivery on 2023. But I'm assuming that the 2023 delivery could be materially better than, I think, the EUR 700 million you budgeted for initially. And then secondly, on leverage, you clearly said that the EUR 5 billion to 5.5 billion target sort of ambition remains in place. But I thought initially, you set that target also because of the fixed charge cover that was supposed to be -- was not at the level that you wanted it to be. And presumably, that situation has changed. And in relation to that, your CE asset disposal was sort of the bridge to getting you to that level. And at the moment, it seems like you might need less of that cash inflow to get to that ambition. So is there a potential that part of those disposal proceeds already would feed into a buyback?
Yes, Robin. So thank you very much for your questions. Let me take the last one, Matt, and could you cover the first one? So we've -- I mean, we're quite clear, right. So we gave a leverage reduction target to be to EUR 5 billion to EUR 5.5 billion. And as you know, we are -- we really work hard to get to our targets, right? So that's not going to go away. And we're at EUR 5.9 billion today. So we still aim to get to that EUR 5 billion to EUR 5.5 billion position and still have work to do there. At the same point in time, as I said earlier, we are now at EUR 1.3 billion cash capital in the holding company that is pre any proceeds that would come in from the transaction you were referring to. And I can just repeat the answer that I said, which is the gate, which is we are committed to our leverage reduction program. At the same time, we have a EUR 500 million to EUR 1.5 billion, in which we want to keep the cash capital buffer. We're currently operating at EUR 1.3 billion. We have announced a proposal to our stockholders' meeting of EUR 0.09 EPS for the final dividend for the year, so you can do the math around that. And then any excess cash that we have and that we do not need for our business given the large scale transformation is something that as a priority and that priority is that it goes back to stockholders either in the form of dividends or buybacks. Matt?
So maybe on the 2023 operating capital generation outlook, in the presentation we gave you a 2022 outlook because we want to get everybody to sort of guide you as to what to expect for 2022, but it's an excellent question. I'm going to start on this one from just kind of bridging you from where we were to, I think, where we're going to get to. So at the Capital Markets Day, we talked about a EUR 1.3 billion outlook for operating capital generation before holding and funding expenses. And I'm picking that number because that doesn't -- that's not polluted for COVID because we had assumed that we were already out of the woods there. And so that's -- it's an important point to start from that EUR 1.3 billion. Now what has changed since the Capital Markets Day is that the markets have performed far better than what we would have expected. And that's where we talk about something like maybe a EUR 300 million tailwind that we've got. And then you saw that from the operating cap gen in 2022. Originally, we had guided for EUR 1.1 billion for -- sorry, for '21. Originally, we guided for EUR 1.1 billion in 2021. But then -- but we ended up at over EUR 1.4 billion. A lot of that was due to markets. So as long as markets kind of stay in this kind of a range, we have benefited from higher equity markets and we have benefited from higher interest rates. So kind of start with that EUR 1.3 billion and then think about we're probably 300 -- we're probably EUR 300 million ahead of that. And if things continue, then that will be retained in the 2023. Now after that, you got to deduct the management actions that we've taken. So I've called out a couple of times. We've taken about EUR 150 million worth of management actions over the course of the year, the longevity reinsurance transaction and on and on and on. But -- so deduct that. And if you do that, I think that you're going to get to a spot where you're in that EUR 1.5 billion neighborhood. So that's going to be -- I think the one other piece that I need to mention is the UFR reduction. When we did the Capital Markets Day, interest rates in Europe were at pretty low levels and there was no expectation in 2023 that, that UFR decreased, that 15 basis points a year that we've been experiencing. We thought that, that was going to continue. But given that interest rates are up, at this point, there's not going to be that reduction. So actually, operating capital generation in the Netherlands is going to shoot up. And that's one of the reasons why our outlook for 2022 will end up paying more and remitting more out of the life company than actually their operating capital generation is expected to be for 2022. So if you add all that up, you get to a number that's in that EUR 1.5 billion range, which I think is the reason.
And on remittances from that point on?
Remittances -- so let's say, the -- for the Netherlands, we would expect at this point, we would continue with the EUR 50 million per quarter. For the U.S., we will see that you can rely, again, given current markets on the remittance levels that we've gotten out so far, maybe ticking up a little bit. We want to be -- again, this is one of the reasons why we didn't give so much guidance for 2023. We really want to see that operational improvement program kick in, in the other country units as well.
But in this bridge, you're not really putting any OCG value to the operational improvement that's still to come. Why is that?
There actually is a benefit in it, and it's about, let's call it, EUR 100 million that's going to be embedded in there.
Okay.
But the important thing is that the EUR 100 million would have been embedded in the 2023 guidance that we gave at the Capital Markets Day anyway. That's why the -- that's why we are getting a benefit from it -- as a bridge from 2023 than then you don't pick it up. It's I'm sure IR can help you with the various different ways of bridging to get to it. But at the end of the day, you will come to a number that is in that EUR 1.5 billion range, OCG in the business units for 2023.
We will now take our next question from Nasib Ahmed from UBS.
So the first one, you mentioned the reinsurance transaction with Wilton Re. I they think reinsured long-term care books in the past. So given you've got a relationship there, I was wondering if there's anything you're planning on doing in the long-term care book? Or do you think that you're the best owner of the book at the moment? And then secondly, sorry to come back on the variability book. Just a quick question here on the side of the book and sort of the appetite for third-party transactions in the market. Do you think you can do a transaction given the size of Aegon's book of EUR 80 billion? Or it's going to be in a couple of transactions? And what's your thinking there is going to be -- I think you've mentioned reinsurance in the past, that's probably going to be the likely solution. And any more actions that you need to take or can take to improve the pricing on the book that you eventually achieved?
Yes, Nasib, this is Lard. Let me take the VA piece. Not much to add to what I said earlier. We have -- we will give you -- we will give the market an update on our considerations at the Q1. So I think speculating about all the potential solutions that would be available or not available to us, I think, is at this point, not I think, very helpful. So we're working hard on it. We've done a lot of work on the VA book, and we aim to give you an update in Q1 -- the Q1 results. So maybe, Matt, over to you.
Yes, on the book -- so maybe first on the VA book, everything Lard just said is perfect. We can take small management actions on that book. So for example, we have done rider rate increases where it's possible. So this is really, as a financial asset, we think of it as a hunt for capital, leave no stone unturned. But I would say on that kind of thing, it's relatively small in the grand scheme of things, but I just want to point out that we're actively working these things. On the long-term care reinsurance, we are going to be the best owner of this. There is no appetite in the market for reinsuring a big block of long-term care business. I think that we have shown that we have been effective in getting premium rate increases through the state insurance departments, and that's -- we are going to be the owner of this book for quite some years. But again, it looks like we've been pretty effective at managing and so far.
I will now turn the call back to Jan Willem for closing remarks.
Yes. Thank you, operator, and thanks, everyone, for the call today, for listening to us. As always, if you have additional questions, please reach out to Investor Relations. We are happy to help. Have a good day, and thank you for your participation in today's call.