Good day and welcome to the Aegon First Quarter 2022 Results C onference C all for analysts and investors. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jan Willem Weidema, Head of Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning, everyone, and thank you for joining this conference call on Aegon's First Quarter 2022 Results. Before we start, 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 CEO, Lard Friese, CFO, Matt Rider, and Chief Transformation Officer, Duncan Russell. Let me now give the floor to Lard.
Thanks, Jan Willem, and good morning, everyone. We appreciate that you are joining us on today's call and look forward to updating you on our first quarter results and the progress we're making against our strategic and financial objectives. Let's turn to slide number two. The first three months of 2022 have been unprecedented in many ways. The Russian invasion in Ukraine has had a devastating impact on the lives of many people. It also further fueled inflationary pressures and volatility on the global financial markets at a time that many economies were opening up after relaxing COVID-19 measures. I'm proud of our colleagues who continued to effectively support and service our customers in this turbulent environment. Our results and the progress we made on our 2023 strategic and financial objectives are evidence of their great work.
Despite the challenging environment, we have achieved higher sales in many of our strategic assets. We continued sharpening our strategic focus, most importantly through the completion of the divestments of our businesses in Hungary and Turkey to the Vienna Insurance Group. The closing of the sale of our Hungarian businesses resulted in a significant increase in cash capital at the holding. This enabled us to announce a share buyback program and to further reduce our debt. As a result, we have brought our debt into our target range while maintaining a capital position that allows us to distribute excess cash to shareholders. Let me now share with you where we stand on the execution of our operational improvement plan on slide number three. We have made good progress on our operational improvement plan, which, if you recall, included more than 1,200 initiatives.
We have fully implemented more than 900 of these already, of which nearly 100 were completed in the first three months of this year. Far, expense savings have contributed EUR 234 million to the operating results in the trailing four quarters. This level is comparable to previous quarter as the benefit from expense savings initiatives was offset by an increase of performance-related compensation and the unfavorable timing of IT expenses. The latter is expected to even out over the rest of the year, and we are confident that we will achieve our EUR 400 million expense savings target by 2023. In the rest of 2022, we will maintain an intense execution rhythm. Continued discipline in reducing expenses is especially important given the inflationary pressures that we are facing.
Additionally, our growth initiatives are well underway, contributing EUR 165 million to the operating results over the trailing four quarters. This means that we have reached the target we set at the Capital Markets Day. Let's now turn to slide four to discuss the progress we have made on our U.S. strategic assets. In Individual Solutions, we have the ambition to regain a top five position in selected life products over the coming years. New life sales increased by 12% compared with the first quarter of last year, supported by continued growth in the number of licensed agents at World Financial Group. In the retirement business, Transamerica aims to compete as a top five player in new middle market sales. This business continued to build momentum, with this now being the seventh consecutive quarter of written sales over $1 billion.
Net deposits consequently turned positive for the middle market and amounted to $288 million for the first quarter of 2022. On slide five, I discuss our Dutch and U.K. strategic assets. In the Netherlands, we are market leaders in both mortgage origination and defined contribution pensions and continue to attract new customers. Mortgage sales amounted to EUR 2.4 billion, of which two-thirds were originated for third-party investors. Sales have come down somewhat from last year due to our focus on maintaining attractive margins. Nevertheless, mortgages under administration grew by over EUR 4 billion compared with the first quarter of 2021 to almost EUR 61 billion. Also consistently growing our workplace business. Net deposits for defined contribution pension products increased by 8% to EUR 86 million in the first quarter of 2022.
Our offering is low cost, thanks to the scale of our administration subsidiary, TKP. Recently, TKP onboarded the pension fund for the metal and technology industry with over 600,000 participants. This brings the total number of pension participants serviced to 3.7 million. Moving on to the United Kingdom. The platform business generated net deposits of GBP 724 million across the workplace and retail channels. Net deposits for the retail channel turned positive and were the best since the re-platforming of the Cofunds business in 2018. Enhancements made to the platform's functionality and investments in the servicing of intermediaries have been driving the gradual improvement in net deposits. 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 product portfolio. Let's turn to slide six. The results of our global asset manager in our growth markets. Our asset management business expanded its long-standing track record of positive third-party net deposits, which reflects the strength of our investment capabilities. In the first quarter of 2022, both our global platforms and strategic partnerships contributed positively. Global platforms achieved more than EUR 400 million of third-party net deposits. The operating margin of global platforms improved by more than three percentage points to approximately 16%. This reflects increased revenues, partly from attracting third-party net deposits and flat expenses. Our strategic partnerships continue to perform very well with EUR 2.3 billion net deposits.
Higher management fees from attracting net deposits and one-time investment income contributed to an operating result of EUR 51 million for the quarter. In our growth markets, sales and margins on new business were impacted by industry-wide challenges from both COVID-19 and a lower demand for critical illness products. Overall, new life sales decreased by only 1% to EUR 64 million, and non-life sales grew by 13% to EUR 33 million, reflecting growth in the bank insurance channels in Spain and Portugal and Brazil. Let me turn to slide number seven to discuss the progress we made in sharpening our strategic focus. In March, we announced the completion of the divestment of our businesses in Hungary to the Vienna Insurance Group. This was followed by the closing of the sale of our Turkish business in April, and both marked important steps in Aegon's transformation.
In the course of 2022, we expect to also close the sale of our operations in Poland and Romania. These actions do not stand on their own. In the past one and a half years, we made strategic choices like selling our U.S. venture fund, winding down both our corporate insurer and internal reinsurer, exiting our business in Mexico, divesting Stonebridge in the U.K., as well as ceasing the funding of GoBear, followed by a sale of its remaining operations. In April, we decided to wind down our European venture fund and sold one of its investments. These transactions reflect our aim for Aegon to be a more focused group. Management time and resources are spent on the markets where we believe that Aegon is well-positioned to create value. We have supplemented organic growth with select add-on acquisitions.
For instance, we acquired TAG Resources in March to strengthen our competitive position in the U.S. pooled retirement plan market, which is a strategic growth driver. The actions we have taken to optimize our portfolio of businesses have provided us with the financial flexibility to launch a share buyback program and retire additional debt. In summary, we are making significant progress in our strategic priorities. We will continue to drive efficiencies while at the same time invest in products and services that better serve our customers. With this, I would like to hand it over to Duncan to give you an update on our U.S. variable annuity business. Duncan, over to you.
Thank you, Lars. Good morning, everyone. At our Capital Markets Day, we laid out our intention to maximize the value from our financial assets by accelerating, increasing or de-risking the cash flows of these blocks of business. We've made good progress across the board in this area, whether that is through the active management of our long-term care exposure or through our various efforts to improve the predictability and level of remittances from the Dutch Life business. Of course, this has also been the case for our variable annuity portfolio, where we have implemented a series of management actions. It started with an expansion of our dynamic hedging program in order to further protect our balance sheet from market movement. In the first quarter of 2022, we achieved a hedge effectiveness of 97% on a dynamic hedge program, continuing our strong track record.
Furthermore, we successfully completed a lump sum buyout program, whereby 18% of the eligible policyholders accepted the offer. We bought out these policies below the economic value of the liability. Combined with the increase in fees we have implemented on certain products, we have created approximately $250 million of capital. Our actions have led to a material reduction in the capital that is backed in the variable annuity portfolio. Variable annuities now only represent 16% of Transamerica's total required capital compared to 23% at the time of the Capital Markets Day. A reduction of approximately $700 million-$1.3 billion. As shown on slide 10, variable annuities is a sizable business with over $75 billion in account value.
It is also a heterogeneous portfolio with a broad range of riders, each with a unique profile. Newer contracts with minimum withdrawal benefit riders, GMWBs, represent about half of the account value and two-thirds of the allocated capital. These are sold in the last two decades, and you can see that the statutory reserves are negative, reflecting the strong economics of the product. A different picture emerges for the older variable annuity policies with minimum income benefit riders, GMIBs. These represent less than 10% of the total account value, but the vast majority of the reserves we need to hold due to the in-the-moneyness of the guarantees. Our expanded hedging program now also addresses this book. Variable annuity policies with only a death benefit, GMDBs, have a relatively high net amount at risk. This reflects the theoretical risk of all policyholders dying immediately.
Obviously, this is not a realistic outcome, and consequently, the required statutory and economic reserves for this book are limited. The VA portfolio contributes a sizable share of the operating capital generation of Transamerica, but will shrink over time as withdrawals run at around 10% per annum. For the period 2022 to 2024, we expect the variable annuity book to contribute between $150 million and $200 million of operating capital generation per annum, with a decreasing trend over time. As a reminder, the majority of this is driven by the fees we earn on the base contract, with the key assumption being that equity markets deliver a total return of 8% per annum. On slide 11, I highlight that following the actions we have taken, the residual risks on the variable annuity portfolio are manageable.
As a result, our capital generation is becoming more predictable. This is, to remind you, one of the management goals of the financial assets we own. The main driver of capital generation volatility in the future will be the impact of equity markets on our base fees. We feel that this is something that is easy for our shareholders to understand, and we are compensated for over time. Aside from this, the residual capital volatility from market movements mainly relate to the fund basis risk and the risk of spikes in realized and implied volatility. On the latter, we took a new action in April when we implemented a more stable long-term assumption for implied volatility under the statutory capital regime. Similar to management actions we have taken in the Netherlands, this will stabilize regulatory capital gen.
Regulatory capital and remove our sensitivities to short-term market movement that tend to revert to the mean. This will improve the predictability of cash flow coming out of the book going forward. We also think we can take steps to improve our basis risk exposure, especially in policies with GMIB riders, where there is a wider range of underlying fund choices. In the coming quarters, we will be looking for additional management actions to produce more predictability in this area. I'm now turning to page 12. I've laid out how we have released capital, reduced capital volatility, and improved the risk-return profile of the variable annuity portfolio. As a consequence, we have largely completed the big steps we anticipated at the Capital Markets Day with respect to the actions under our own control.
We are comfortable with what we have remaining and will of course continue to optimize as we do with all our financial assets. I now want to explain where we sit with respect to potential third-party transactions on the VA portfolio. Over the last half year, we have been preparing ourselves to engage with counterparties to explore our options around reinsurance of parts of the VA block. We dedicated significant internal resources and have engaged external actuarial resource to analyze different possible transaction parameters. As a result, we believe that we are now ready to engage with external parties. It is important to recognize that there are trade-offs, which means that a transaction with a third party is not a given for us at Aegon, and our shareholders should be prepared for a situation where we do not undertake a third-party reinsurance deal on this block.
Our considerations are as follows. First and foremost, it goes without saying that any deal we would do would need to have a satisfactory financial outcome. We will look to compare the upfront capital released to the expected value of the cash flows if we were to maintain full ownership of the VA portfolio. Given our comfort with what we have remaining, this is not a block where we will transact at any price. Second, and no surprise here, any transaction would need to deal appropriately with counterparty risk and also leave us with manageable operational implications for the rest of the organization. Third, and probably most complicated, we would require sensible and manageable knock-on implications.
For example, it could be that a transaction would trigger reserve flooring that may materially change our capital sensitivities and also change the level and profile of our ongoing capital generation. Given our drive to simplify and stabilize our financial asset businesses over the past one and a half years, this is something we would be very cautious about and have little tolerance for. We will be rational in our decision-making on this topic, and any decisions will be made with the lens of creating shareholder value and the overall transformation of Aegon Group. With this, I would now like to hand over to Matt, who will talk you through our financial results for the first quarter.
Thanks, Duncan. Good morning, everyone, and again, welcome. Let me start with an overview of our first quarter financial performance on slide 14. As Lard already shared, Aegon's addressable expense savings for the trailing four quarters totaled EUR 234 million, paired with our full-year 2019 expense base. Aegon's operating result increased by 7% to EUR 463 million, supported by an improvement in claims experience in the U.S. And the positive contribution from growth initiatives. Operating capital generation increased from EUR 223 million to EUR 318 million. This increase was driven by an improvement in U.S. claims experience, as well as strong performance in the other units, including from favorable claims experience and exceptional items.
The proceeds from the divestment of Aegon's businesses in Hungary and the EUR 76 million free cash flow for the quarter increased cash capital at the holding to EUR 1.8 billion, clearly above the top end of our operating range. This allowed us to announce a debt tender offer, taking us into our gross financial leverage target range of EUR 5-5.5 billion, and also announce a share buyback of EUR 300 million. Our balance sheet remains strong with the capital positions of all three of our main units above their respective operating levels at the end of the quarter. The Group Solvency II ratio decreased by one percentage point over the first quarter to 210%.
In contrast to the cash capital, the Solvency II ratio already reflects the debt tender offer and share buyback that were announced in March of this year. We continue to actively manage our risks and our capital position, especially in our financial assets. For the variable annuity book, our dynamic hedge program performed well with a hedge effectiveness of 97%. Furthermore, we have seen continued success in our long-term care rate increase program. We achieved approvals for another $26 million of rate increases, which brings the total to 82% of the $450 million of LTC rate increases we expect to have approved as part of this program. Turning to slide 15, we saw the first quarter operating result come in at EUR 463 million, an increase of 7% compared with the same period last year.
The increase was driven by an improvement in claims experience in the U.S., a positive contribution from growth initiatives, increased fees from higher equity markets compared with the first quarter of last year, and favorable currency movements. These more than offset higher expenses in the Americas and the impacts of increased benefit costs and outflows in variable annuities. Adverse mortality experience in the U.S. amounted to EUR 102 million. Deaths that were directly attributable 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 and traditional life, which we believe to be, at least in part, indirectly related to COVID-19.
The adverse mortality experience was partly offset by EUR 56 million of favorable morbidity experience in the long-term care book, which included a EUR 12 million release of the incurred but not reported reserve. In the Netherlands, the operating result increased by 1% to EUR 187 million. The results of mortgages and workplace solutions increased and were supported by business growth, while the results of life and bank decreased and reflected lower investment income. In the U.K., the operating result increased by 29% to EUR 51 million. This was driven by increased fees from higher equity markets and positive net deposits on the platform in addition to expense savings. The operating result of international increased by 57% to EUR 47 million. The increase reflects business growth, in particular in Brazil, Spain, and Portugal, as well as more favorable claims experience overall.
Finally, the asset management operating result decreased by 9% to EUR 68 million. The normalization of performance fees in the Chinese asset management joint venture from last year's exceptionally high level was partly offset by higher management fees from third party net deposits. Let us now turn to our net result on slide 16. Our net result for the first quarter of 2022 amounted to EUR 412 million. Non-operating items amounted to a loss of EUR 399 million as a result of fair value losses. These fair value losses were mainly driven by the interest rate hedges for U.S. variable annuities with guaranteed minimum death benefit and guaranteed minimum income benefit riders. This program targets to hedge the economic liability.
However, under IFRS reporting, discount rates for liabilities are locked in, which led to an accounting mismatch and resulted in fair value losses from the increase in interest rates during the quarter. These hedges continued to effectively protect Aegon's capital position against market risks. Other income amounted to EUR 330 million. This primarily reflects a EUR 372 million book gain from the sale of Aegon's businesses in Hungary, and EUR 63 million of one-time investments related to the operational improvement plan. I now turn to slide 17 to go through the capital positions of our main units. The capital ratios of our three main units ended the quarter above their respective operating levels. The U.S. RBC ratio decreased two percentage points over the quarter to 424%, largely as a consequence of unfavorable equity markets.
This was partially offset by one-time items, including a management action to recognize previously deferred hedge gains. Furthermore, operating capital generation more than offset dividend payments from the life companies to the intermediate holding company. In the Netherlands, the Solvency II ratio of the Dutch Life unit remains stable at 186%. In the context of rising interest rates, the Dutch Life business reduced its fixed income investments and made regular hedge adjustments. Both actions lowered required capital and had a positive impact on the ratio. These actions were offset by the anticipated impact from the reduction of the ultimate forward rate by 15 basis points and the negative impact from market movements. The latter was largely driven by higher spreads and the impact of rising inflation expectations on required capital and the risk margin.
Operating capital generation more than offset the new regular quarterly remittance of EUR 50 million to the group. The solvency ratio of Scottish Equitable, which is our main legal entity in the U.K., increased by 10 percentage points to 177%. The increase of the ratio was mostly driven by operating capital generation and a reduction in required capital as a result of market movements. Continuing on to the development of cash capital at the holding on the next page. On slide nine or slide 18, you see cash capital at the holding increased to EUR 1.8 billion at the end of the quarter, which is above the top end of our operating range. This was largely driven by proceeds from the Hungarian divestment, as well as by remittances from the business units.
In the Netherlands, the actions we have taken to strengthen the capital position, improve the risk profile, and increase capital generation have allowed us to double the quarterly remittances from the life business to EUR 50 million. This contributed to the EUR 76 million of free cash flow during the quarter. Divestment proceeds net of an earn-out payment for our joint venture with Santander amounted to EUR 553 million, and mainly reflected the closing of the sale of our business in Hungary. Our cash position provided us with the financial flexibility to reduce our debt through a tender offer and announce a EUR 300 million share buyback.
The share buyback is being executed in three tranches of 100 million each, with each tranche conditional on maintaining the capital positions of our main units in line with the stated ambitions, and the cash capital at the holding being above the middle of the operating range. The first tranche of EUR 100 million is expected to be completed in the second quarter. We announced today that the second tranche is expected to commence on July seventh, and is expected to be completed in the third quarter. With that final note, I now pass it back to you, Lard.
Yes, thank you very much. Looking ahead on Slide 20, we are seeing the impact from COVID-19 subside and several central banks tightening their monetary policy to address rising inflation. While global economic and geopolitical uncertainty remains, the action we have taken to strengthen our balance sheet help us to navigate through this, and I'm confident that the progress we are making on the execution of our strategy and the implementation of our operational improvement plan keep us on track for delivering on our strategic and financial objectives. Encouraged by the start of this year, we are fully energized to continue our transformation journey in 2022. I would now like to open the call for your questions, and in the interest of time, I kindly request you to limit yourself to two questions per person. Operator, please open the Q&A session.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll now take our first question from Andrew Baker from Citi. Please go ahead.
Great. Hi, guys. Thanks for taking my questions. First one's on capital generation. Can you just walk through some of the moving pieces here for the quarter, and then maybe comment on what you see as a sustainable run rate going forward relative to the 1.2 run rate guidance that you provided early in the year? Secondly, I guess it's somewhat related, but the EUR 1.2 billion that you guided for had EUR 150 million assumed for excess claims in it. Given the favorable claims that you've seen in Q1, do you expect them to come in below that 150 now? Is there anything specifically to call out on some of the favorable claims that you've seen outside of the U.S., please? Thank you.
Thank you, Andrew. Matt, over to you.
Yes, thanks for the question. As you point out, it was indeed a very good operating capital generation quarter here in the first quarter, especially given the fact that normally we would see seasonally volatile claims in the first quarter. Coming out with the EUR 385 million operating cap gen before holding and funding expenses, so this is what's generated in the business unit was definitely above what we had guided for at the last earnings release. Maybe I can walk you through a little bit of the puts and takes of this one. Again, operating capital generation at EUR 385 million during the quarter. Then of that, you had EUR 45 million of net adverse claims experienced.
A little bit worse on mortality, significantly better on morbidity, but in general, EUR 45 million of net claims experienced. The COVID mortality claims, where we had guided on 150,000 U.S. population deaths for the first quarter, that's basically what we got in the first quarter. The mortality results on COVID were pretty much in line with our expectations. Anyway, if you go from the EUR 385 million and you add back the EUR 45 million of adverse claims experienced that we had, that gets you back to about EUR 430 million, excluding the claims experienced within the U.S. Then after that, we had exceptional items outside of the U.S. totaling about EUR 65 million, and that was. It was really spread all across the business units.
Some of them, you know, could potentially be recurring, some of them were more exceptional in nature. With that, correcting for those positive variances, you get to about EUR 360 million, which was pretty much in line with the guidance that we gave in that quarter. Maybe a good way to bridge that, going forward, what our operating capital generation expectations are going forward. You know, last quarter we said for the full year would be something around EUR 1.2 billion for the full year 2022.
At this moment, we now expect to come in at somewhere between EUR 1.2 billion and EUR 1.3 billion for the full year, despite the fact that equity markets have come down significantly from when we made our last earnings announcement. The equity markets are down, you know, at this moment a little bit more than 10%, relative to last February when we published that guidance. I can take you through some of the parts of this one. You know, again, the one point, somewhere in that 1.2 to 1.3 billion range, we exceeded, you know, let's say we exceeded the guidance that we had gave last year for the first quarter by about EUR 100 million. Then we're gonna have.
There are some puts and takes. We see equity markets a little bit down, 10% down relative to where we were in February. We have exchange rates that have moved a bit, and that's helping us on a euro basis. If you do the math on that, you get somewhere between that EUR 1.2 billion-EUR 1.3 billion range. Our ultimate results for the year are going to depend on market movements going forward and how mortality develops and the like. That's probably a good bridge to the second part of your question, you know, what do we expect for COVID claims? We had guided for 300,000 U.S. population deaths in 2022.
We had guided for first quarter of about 150,000. That's exactly what we got. The way that we have done this outlook is that we still expect to get about 300,000 U.S. population deaths. We're gonna maintain our sort of rule of thumb of, you know, 50 million per 100,000 population deaths, and that's the way that we come to it. You can of course write in whatever number you want for COVID, and you know, markets of course will develop, but that's the way that we're thinking about the guidance for the full year.
We will now take our next question from Fulin Liang from Morgan Stanley. Please go ahead.
Thank you very much. Thank you, Matt, for just upgrading the OCG target. As a follow-up actually, because you have two set of targets. One is OCG and another one is free cash flow. What I noticed that you have a very good OCG, but you also have a relatively large like maybe market movement from the overall capital generation. I wonder, would that actually, while you're upgrading your OCG target, would you remain your free cash flow target or actually, you'll keep your free cash flow target unchanged because of some negative on the cash item from market?
That's the first question. Second question is probably on the VA book hedging. I have many questions, so I wonder actually where I should start. I guess the question is, should we expect whatever your solution, assuming that you finally chose an external party to on the transaction, should we always expect that the outcome would be you will release capital and return the capital to the shareholders, and that is your first priority? Can I say that? Thank you.
Fulin, thank you very much for your questions. The first question will be taken by Matt, and Duncan, you'll take the second question. Or Matt? Yeah. Take the second question. First question on free cash flow, to Matt.
Yes. On the free cash flow, we're not upgrading our guidance on that one, you know, at this point in time. Let's understand how the year is going to play itself out. I think one thing that we had demonstrated though last year was that, you know, we want the business units to maintain their regular dividend payments. They did that successfully. But there were also exceptional items where we took dividends out of companies where the ratios were higher. I wouldn't really guide on the free cash flow, per se, in terms of regular remittances. But we operate, you know, capital pretty tightly here at the group. There might be a benefit in it, but we're not gonna upgrade any guidance.
Okay. Thank you very much for that, Matt. Duncan, over to you on the VA.
On the VA, I think today we've been pretty transparent about our objectives and planning around this. The first statement is, we've announced today that we are going to engage with third parties following a period of time of significant internal work and preparatory work. Second is that we gave you some criteria, deal certainty, manageable knock-on implications, and importantly, a satisfactory financial outcome. That's something which we'll only get greater insight into as we do indeed engage with the parties over the coming months and quarters. In terms of the actual financial outcome, if we do indeed do a transaction, that will then just flow into our normal capital management policy. Nothing specific to add there.
Our normal capital management policy, Fulin, is that we have a, you know, we want the units to be well capitalized with the cash buffer, the holding company, that we maintain a range of EUR half a billion to EUR 1.5 billion. If we get above that range or, you know, then we have capital we don't need for running the business, the priority is to give that back to shareholders, as we have just, by the way, demonstrated in this quarter.
Okay. Thank you.
We will now take our next question from David Barma from BNP Paribas. Please go ahead.
Good morning. Thanks for taking my questions. I have two follow-ups on the variable annuities, please. Firstly, could you remind us the sensitivity to equity markets of some of the metrics you've disclosed today on slide ten, especially on the operating capital generation and maybe some of the CTE numbers as well. And secondly, if we look at this on a cash view, what would be the implications from a cash remittance perspective, were you to pursue any transactions on that portfolio? Thank you.
Thanks for your question. Maybe just some very basic data on the variable annuity portfolio. At this moment in time, we hold reserves of about $1.4 billion on the total annuity book. To that, we have about $1.3 billion of capital that is allocated to it on our kind of at our 400% target basis. In terms of the equity volatility that is embedded in this book, that's the big driver of the published equity sensitivities that we always put in the press release. You'll see that they did not move a lot from the previous quarter.
That's largely a consequence of the base fees, not so much, you know, what's happening in the reserve movements of the underlying guarantees. It really is in the base fees.
Thank you very much, Matt. The second question, Duncan.
Well, the financial implications of a transaction is indeed one of the primary inputs into our considerations as to whether we will or will not do a reinsurance deal ultimately. In the presentation, I highlighted that the VA block is expected to generate EUR 150-200 million of OCG for the next couple of years. Bear in mind that the book is falling by around 10% per annum due to natural withdrawals. Most of that, as Matt just highlighted, is from base fees. Indeed, we will need to weigh up the emergence of that cash flow and the ability of that to support remittances over time with the upfront implications on our RBC from any transaction, which we may or may not do.
Thank you. Sorry, just to come back on the first point. In the EUR 150-200 million OCG new guidance, what was the impact of the lower base fees on the lowering of this number?
Maybe just to answer it from a little bit of a higher level. Total operating capital generation on the book was $61 million, I think, for the course of the quarter. That would have been a small amount impacted by the lowering of base fees during the course of the quarter. It would have been relatively small.
Thank you.
We will now take our next question from Michael Huttner from Berenberg. Please go ahead.
Fantastic. Thank you very much. On the slide 30, you show the base assumptions. I just wondered, what's the sensitivity of that VA book, the main metrics to the interest rates, 'cause rates are now higher than the interest rates in the U.S., which you've assumed. The other question is on U.S. mortality. I think you've got $1 trillion total exposure. I just wonder if you can give a little bit of color to that, which portfolios is it in, is it in the VA or is it in universal life, and how should we expect it to affect. I mean, but not worst-case scenario, it's worst-case scenario that could be unmanageable.
You know, relative to what you've seen here, relative to what you've seen in Q1 and also last year, how would you view the emergence of those of that mortality risk compared to your original assumption in 2020? Thank you.
Matt Rider, over to you.
Maybe I can take your first one. I'm looking at that slide 30 where we talk about the main economic assumptions. These are only really relevant for IFRS, and they're not really relevant for capital generation for us. Interestingly, when we go over to IFRS 17 in 2023, we will not have to make any of these long-term assumptions, frankly, for publishing our financial results. In terms of the mortality risk, I think that's specifically for the life block. Is that how we wanna think about it? You know, right now we have seen obviously poor mortality experience as a consequence of COVID.
You've seen in my opening remarks that, you know, we have an additional amount of that or additional amount of mortality experience which we think is at least COVID related. It's very difficult to look inside of this to see what that might do to our long-term mortality expectations. You may recall, like last year, we decided we're not gonna change any long-term mortality expectations at all because the results were really polluted by the COVID environment. I would say that this is gonna be a similar kind of year. It's gonna be very difficult to look through the, you know, the long-term impacts of COVID on what our long-term mortality. So that one to be continued, by the way, not just by us, but by the entire industry.
Well, maybe you can give. Just a figure would be really helpful, maybe just a reserve figure.
A reserve figure for what? The life block?
Yeah.
The insurance.
No, I got it. For the overall life block, think of it as for $40 billion, the entire life block.
Great.
In the, in the U.S.
That's the exposure rather than the reserve.
That's the IFRS reserve liability net of reinsurance on our books.
How much of that relates to just mortality?
Very difficult to answer that question because a large part of that would be accumulated account value, so cash surrender values, for example, in universal life type contracts. Reserves are always a combination of sort of accumulated value to the customer together with long-term mortality expectations. We can get more detail. Probably good to give Investor Relations a call on this one, and they can get more details if you want this one.
Cool. Thank you.
We will now take our next question. Stephen Hayward from HSBC, please go ahead.
Thank you very much. Two questions on your variable annuity plan or potential plan to come. Is there a preference for doing transactions with third parties or any particular portfolio of VA, you know, GMWB, GMDB or GMIB? And, you know, do third parties actually have a preference for taking on particular portfolios? I don't know whether there's been a majority of GMWB transactions in the market or a different portfolio. I'm just trying to gauge what is the appetite in the U.S. third-party providers to do these transactions. And then secondly, you mentioned that, you know, the operating cash generation of the book is around $150-$200 million. That's, you know, 10%-15% of your total operating capital generation.
If you're thinking about a potential disposal amount, does that disposal amount to make it an economically attractive deal for you include the potential capital release, or is it just on the loss of OCG? That makes sense.
Duncan, over to you.
Thank you very much, Stephen, for your questions.
Duncan.
I think, Stephen, you've hit on two of the main topics actually, which we ourselves are considering internally. On the first part about specific blocks of business, I'm not gonna go into any details there. That is something we spent quite some time internally preparing ourselves for, but we obviously haven't yet engaged with third parties, and that is exactly what we want to do in the coming weeks and months to firm up if there is an alignment between our ambitions and our intentions and theirs. You're right to point out that there in fact hasn't been many transactions at all in the VA space, particularly in reinsurance pool. This will be something which is complicated, which will take some time.
That's why we are saying that we are going to compare the outcome there with the alternative of keeping this and continuing to manage it in a sensible way. The second question was on how we will measure, in fact, the value, I guess, the value creation from a deal. Indeed, that will be a simple comparison between the amount of capital we can release on day one, which we highlighted in the presentation has fallen but is still reasonably substantial, versus the loss of capital generation going forward. You can kind of think of that as an IRR or net present value, a simple corporate finance sort of analysis. That will be an important consideration for us, along with certainty and the knock-on implications as you take this look out.
There could be other consequences on things like reserve floor entry highlights on plate, which we want to get a grip on so they are manageable.
Okay. Very good. Thank you very much.
We will now take our next question from Robin van den Broek from Mediobanca. Please go ahead.
Yes, thank you very much for taking my questions. The first one is a bit of a clarification on the guidance, because I think the 1.2-1.3, taking into account the beat in Q1 implicitly is a downgrade versus the previous guidance. I'm just trying to get full understanding of what's driving that. It's probably equity markets is probably key driver here. I was also expecting that in the Netherlands, for example, I think maybe this is not for Q2, but for Q3, you should probably see some further release into OCG from UFR drug, given what rates have done pretty parallel in equity to date. I was wondering if that's part of the guidance.
Next to that, I think reinvestment risk in the U.S. has probably turned positive. So I was wondering to what extent those factors are taken into account when you give that guidance. Also in relation to that, with the VA book, your run rate was 250-300 last quarter. It's gone down, which I guess is partly given by the lump sum and the 10% gradual rundown. But can you talk a bit how these factors are embedded in that guidance? Last quarter, you were also very kind to provide some insights on how to think about 2023. If you can. Yeah. Sorry, 2023.
It would be very helpful to get that same picture again. A little bit in relation to capital generation, I think in the Netherlands you're using long-term return assumptions. If I remember correctly, I think the mortgage spread was close to 120 basis points, which seems to be on the high side. Can you just give a bit of clarification how your long-term assumptions are tracking to actual observable spreads at the moment, and how that is feeding into your OCG for the Netherlands? Thank you.
Yeah. Thanks, Robin, for your questions. It's by no means a downgrade, by the way, but I'll give the floor to Matt.
Thanks, Robin, for your questions. First of all, I'd like to ask which two of those five would you like me to answer? No, I'm only kidding. I'll do all of them.
Good.
On the first one, on the operating capital generation guidance, the 1.2-1.3 is not a downgrade. In fact, we had guided toward 1.2 last quarter. Now we're upping that guidance. You know, again, depending on how the year ultimately shakes out with respect to markets and mortality, then we'll see where it ends up.
In general, if you look at basically the run rate of EUR 300 million that was implied from the guidance last quarter, we're maintaining that EUR 300 million effectively that guidance for the next three quarters, despite the fact that we have equity market declines that are fairly material. I would not consider that to be a downgrade. The next one on the Netherlands, what's happening with operating capital generation? Actually, the yield curve movements have not been parallel.
That's the reason why you didn't see really a decline in the solvency ratio of the Life company. Although interest rates had moved up during the course of the quarter, which would normally be a bad guy for solvency and a good guy for operating capital generation, you also saw curve flattening, which basically eliminated the result on both sides of the equation, both in operating capital generation and in the solvency ratio.
The reinvestment in the U.S. is a very important point here because, you know, usually what we have said is that in normal years, we reinvest something like $4.5 billion-$5 billion or $4 billion-$5 billion, as a consequence of debt rolling off, and we have to reinvest that. Now we have book yields that are actually new money yields are slightly higher now in the U.S. than they are for book yields. As a consequence of interest rates having risen so quickly, we have had an outflow in terms of liquidity, so we don't have so much money to reinvest. We're also going to see some headwinds with respect to funding costs.
In general, while higher interest rates are actually quite good for us in the medium and long term, short term, we're not gonna see so much of a benefit from the rising rates just because we don't have so much liquidity to invest. For the next couple quarters, you're not gonna see much of a movement in that one. Long term, good. Short term, it's not really gonna have so much of an impact. On the VA side, yes, indeed. Last quarter, we had guided for EUR 250-300 million run rate on operating capital generation. Now we're saying you can think of it really as two. We expect to get about EUR 200 million over the course of 2022.
The runoff of the book will start to erode that. We think, you know, from 200 maybe in this year, in three years time, maybe 150, something on that order. We are getting hit probably more by fees in the long term. You're seeing that reflected there, the decrease in the equity markets. We do expect that claims deviation that we saw in the first quarter to reverse. Really it's gonna be the decrease in the equity markets that are gonna hit fees, and that's why that's gonna be downgraded a little bit on the VA side. Pluses in other places, but on the VA side, we expect it to be a little bit less given current markets.
With respect to long-term capital generation, I didn't quite get the last. Oh, on the observed spreads. Yeah. In general, what we are doing, and you have it right, in the Netherlands, we assume 118 basis points as the long-term spread assumption for mortgages. Currently it's lower than that, but we think of that as you know, a better reflection of a long-term capital generation. We do it in this manner. Of course, we're a little bit lower now, what will you see? You'll see operating capital generation may be a little bit high.
You'll see a drag in the solvency ratio, but we view this as a long-term measure on which to run the book. I've lost my train of thought with all those questions, but probably important to come back to the first one, the operating capital generation guidance, which is the important one for today. EUR 1.2 billion-EUR 1.3 billion, that's what we're expecting for the full year, despite the fact that we have lower equity markets as of today.
Maybe, Matt, on the rates dynamics, I hear what you say. I think that's exactly true for Q1. I think since Q2, the move has been more parallel and has been positive. Netherlands should probably benefit from some rate dynamics in the third quarter. Do I understand correctly, you don't wanna entertain OCG thoughts on 2023 or?
I can talk about 2023 guidance too. You're right, by the way. In terms of the curve shifts, they were non-parallel during the first quarter, but then since then they've been up. It's a little bit in parallel. For 2023, probably the best way to do this is to go off of the 2022 guidance. Here we're gonna be again EUR 1.2-EUR 1.3 billion. Then the things that if I were you that I would factor in, embedded in that is about EUR 150 billion worth of adverse claims experienced due to COVID.
We think that hopefully by the time we get to 2023, we won't have to talk so much about COVID. Maybe add EUR 150 million to that. Plus, we're gonna start to see the, you know, the operational improvement plan start to kick in, for about, you know, just think of the round numbers, maybe EUR 100 million a year. That would be an uptick from 2022. Then finally, we have the, so you know, you remember that there's normally a UFR reduction, 15 basis points. We reflected it in the quarter this year. If rates stay kind of where they are, we're not gonna have another rate reduction until 2024. 2023, you can add another EUR 100 million to operating capital generation.
Actually the way that things stand today, the next time there would be a 15 basis point decrease wouldn't be until 2030. Again, given current markets. Hopefully, you know, over time, we're gonna be not talking about so much UFR. Take our 2022 guidance, add 350, and that gets you in the ballpark for 2023.
The 1.2-1.3, that actually sort of ignores the exceptionals of the beat in Q1. Is that how I should look at that guidance? Because you're using it as a bridge.
No, that's four years. That takes into account the exceptionals in 1Q. Then EUR 300 million run rate guidance for the balance of the year should give you
Okay.
Fourth quarter. Yeah.
Okay. Thank you very much for the color. Very helpful.
We will now take our final question from Nasib Ahmed from UBS. Please go ahead.
Hi. Thanks for taking my questions. Sorry for coming back to the variable annuity block, potential transaction. Not sure if you can say much more on sort of your preference in terms of reducing guarantees versus sort of generating value. I know if you're reducing your guarantees on the books, that comes at a cost, but also reduces your potential cost of equity. Just the size of the book is quite large. Presumably, if you can. You said you might do part of that transaction. Presumably, that's kind of one of the reason why you would say that. I'm not sure if you can say that you can do the whole book at the same time, given past transactions at about EUR 30 billion, I think.
Just on the sort of runoff of 10%, that doesn't include any long-term sort of market gains on the account value. You should have -10% plus some assumption on long-term sort of equity value gains as well offsetting that. Second question on the assumption change in Q2 on long-term volatility in the variable annuity book. I think there's a negative impact on the RBC ratio, but does that improve your OCG going forward as well? Thanks.
I'll take it. I'll leave it so I hand over to Matt for the last question. So your question on the VA block, I interpret that to mean what is your criteria versus risk reduction, capital generation, et cetera. To be honest, all of those things will go into the mix. So as we engage with third parties and formulate and see if there is a deal to be done here, we will indeed weigh up the trade-offs between capital generation, risk reduction, stability, knock-on implications, et cetera, just as I have under the presentation. It's hard for me to get more precise than that at this stage because we are entering that engagement phase. In terms of sizing, I think it's you know, this is a complex deal.
This will be a complex transaction, and it does require a lot of resources on our side and presumably also on the counterparty side. That means that any transaction would need to be meaningful to make sense and justify that workload. You're right, we do have a very large book here, and I think it's unlikely that we would transact on the whole book given its size and given the potential counterparty exposure that would bring. It would need to be meaningful but unlikely to be the whole book. Just quickly, the runoff scenario indeed there'll be an offset from account value appreciation. As I highlighted in the presentation, we assume an 8% equity return, and that will provide an offset then.
I'll hand to Matt now for the implied vol.
Maybe I can take the second one first, just in terms of the runoff of the book. You know, we have it's about a $78 billion book, where we would expect to have that number run off about 10% over time. Don't add anything and then subtract. It's just 10% of that just runs off over time. With respect to the volatility assumption, indeed, in Q2, we will set a higher long-term volatility assumption going forward than what it is today. The reason why we do that is we wanna stabilize the RBC ratio going forward. At this point in time, we would think that that would have about a 5 percentage point negative impact on the RBC ratio in Q2.
Your question about operating capital generation is spot on. We set the assumption so that in normal times, actual volatility will fall below that long-term implied volatility. You will see that come back over time. If things go as you know kind of normal, you will see that come through over time in the operating capital generation over time. In terms of very high spikes in the implied vol, we're protected on the solvency ratio, which is the reason why we do this.
Perfect. Thank you. That's very helpful.
All right. Before we close off, I would like to hand over to Lard Friese for some closing remarks.
Yeah. If I just look back at the quarter, I mean, over the last two years, we have really worked hard, as you all know, as one of our key strategic objectives to calm down the overall risk profile of Aegon Group. If I look at the work that's being done, the market backdrop in the first quarter and the print that we did today, on the, let's say, the capital positions, the balance sheet, the way we are able to get also the debt position, the balance sheet in the target range in the first quarter, I think, you know, I think that that's objective and hard work is bearing fruit as I think demonstrated by the capital positions and the strength of the balance sheet today.
I also believe that we're making good progress on the strategic and financial objectives. We remain consistent and focused on delivering upon our financial and strategic targets by the end of 2023. With that, I wanna thank you for your time today, for your attention to the company, and for your questions. I wish you a very good day. Jan-Willem and the team will be ready to support you in any follow-up questions you may have. Thank you very much.