Aegon Ltd. New York Registry Shares

Good day and welcome to the Agon's first quarter 2022 results conference call for analysts and investors. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jan Willem Verdema, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining this conference call on Agon'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 EGOL CEO, Lars Friese, CFO, Matt Ryder, and Chief Transformation Officer, Duncan Russell. Let me now give the floor to Lars.

Thanks, John Milliman. 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. So 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 continue 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. So far, expense savings have contributed €234 million to the operating result 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 400 million euro 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 €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 UK 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 2.4 billion euros, 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 €4 billion compared with the first quarter of 2021 to almost €61 billion. We're also consistently growing our workplace business. Net deposits for defined contribution pension products increased by 8% to €186 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 £724 million across the workplace and retail channels. Net deposits for the retail channel turned positive and were the best since the replatforming of the co-funds 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 upset the revenues lost from the gradual runoff of the traditional product portfolio.

Let's turn to slide number six. The results of our global asset manager and 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 400 million euros 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 2.3 billion euros net deposits. Higher management fees from attracting net deposits and one-time investment income contributed to an operating result of €51 million for the quarter. In our growth markets, sales and margins on new business were impacted by industry-wide challenges from both COVID and a lower demand for critical illness products. Overall, new life sales decreased by only 1% to €64 million, and non-life sales grew by 13% to €33 million, reflecting growth in the bank assurance 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 EGON'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 UK, as well as seizing the funding of GoBear, followed by a sale of its remaining operations. And 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 AGON 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 market today, 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. And 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 the dynamic hedge program, continuing our strong track record. Furthermore, we successfully completed the 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 back 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 market stay, a reduction of approximately $700 million to $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 heterogenic 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 have 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 of 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 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, and 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 relates to 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 and remove our sensitivities to short-term market movements 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 market 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. But 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 Agon, 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 Agon Group. And 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, AGON's addressable expense savings for the trailing four quarters totaled €234 million, paired with our full-year 2019 expense base. AGON's operating result increased by 7% to €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 €223 million to €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 €76 million free cash flow for the quarter increased cash capital at the holding to 1.8 billion euros, 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 5 to 5.5 billion euros, and also announce a share buyback of 300 million euros. 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 in 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 €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 102 million euros. 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 56 million euros of favorable morbidity experience in the long-term care book, which included a 12 million euro release of the incurred but not reported reserve. In the Netherlands, the operating result increased by 1% to 187 million euros. 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 UK, the operating result increased by 29% to 51 million euros. 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%, 47 million euros. 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 68 million euros. 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 412 million euros. Non-operating items amounted to a loss of 399 million euros 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 the 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 Agon's capital position against market. Other income amounted to 330 million euros. This primarily reflects a €372 million book gain from the sale of Aegon's businesses in Hungary and €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 companies. In the Netherlands, the Solventy 2 ratio of the Dutch Life unit remained 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 50 million euros to the group. The Solvency Ratio of Scottish Equitable, which is our main legal entity in the UK, 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 18, you see cash capital at the holding increased to 1.8 billion euros 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 50 million euros. This contributed to the 76 million euro of free cash flow during the quarter. Divestment proceeds net of an earn-out payment for our joint venture with Santander amounted to 553 million euros 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 300 million euro 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 100 million euros is expected to be completed in the second quarter. We announced today that the second tranche is expected to commence on July 7th. and is expected to be completed in the third quarter. And with that final note, I now pass it back to you, Lars.

Yes, thank you very much. Looking ahead on slide number 20, we are seeing the impact from COVID-19 subside and several central banks tightening their monetary policies 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 1 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 1 to ask a question. We now take our first question from Andrew Baker from City. Please go ahead.

Hi, guys. Thanks for taking my questions. First one is 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 earlier in the year? And then secondly, I guess it's somewhat related, but the 1.2 billion that you guided for had 150 million assumed for excess claims in it. Given the favorable claims that you've seen in Q1, are you expecting to come in below that 150 now? And 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. So 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. So coming out with the $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. So maybe I can walk you through a little bit of the puts and takes of this one. So, again, operating capital generation at $385 million during the quarter. And then of that, you had $45 million of net adverse claims experience. So a little bit worse on mortality, significantly better on morbidity, but in general, $45 million of net claims experience. 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. So the mortality results on COVID were pretty much in line with our expectations. So anyway, if you go from the 385 and you add back the 45 of adverse claims experience that we had, That gets you back to about 430 million, excluding the claims experience within the U.S. And then after that, we had exceptional items outside of the U.S., totaling about 65 million euro. And it was really spread all across the business units. Some of them could potentially be recurring. Some of them were more exceptional in nature. But with that, correcting for those positive variances, you get to about €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 for what our operating capital generation expectations are going forward. So we started, you know, last quarter we said for the full year it would be something around €1.2 billion for the full year 2022. At this moment, we now expect to come in at somewhere between $1.2 and $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. So the equity markets are down at this moment a little bit more than 10% relative to last February when we published that guidance. If I can take you through some of the parts of this one. You know, again, the one point, you know, somewhere in that 1.2 to 1.3 billion range, we exceeded, you know, let's say we exceeded the guidance that we gave last year for the first quarter by about 100 million. And then we're going to have, then there are some puts and takes. We see equity markets a little bit down, so 10% down relative to where we were in February. And then we have exchange rates that have moved a bit, and that's helping us on a euro basis. So, If you do the math in that, you get somewhere between that 1.2 and 1.3 billion range. And again, our ultimate results for the year are going to depend on market movements going forward and how mortality develops and the like. And that's probably a good bridge to the second part of your question is, you know, what do we expect for COVID claims? So 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 going to 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 Fulun Yang from Morgan Stanley. Please go ahead.

Thank you very much. Thank you, Matt, for just upgrading the OCG target. And as a follow-up, actually, because you have two sets of targets. One is OCG and another one is free cash flow. And so what I noticed is that you have a very good OCG, but you also have a relatively large market movement from the overall capital generation. I wonder, with that, actually, why are you upgrading your OCG target? Would you remain your free cash flow target, or actually you keep your free cash flow target unchanged because of some negative on the cash item from market? That's the first question. And second question is probably on the VA book heading. I have many questions, so I wonder actually where I should start. I guess the question is, could you give us a broad kind of concept of idea? Is that... Should we expect whatever your solution, assuming that you finally chose an external party 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. And can I say that? Thank you.

Well, and thank you very much for your questions. The first question will be taken by Matt. And, Duncan, you'll take the second question from Matt. Yeah, take the second question.

So the first question is a free cash flow to – Yes, so on the free cash flow, we're not upgrading our guidance on that one 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 for the small ratios we acquired. So I wouldn't really guide on the free cash flow, per se, in terms of regular remittances. But, you know, we operate capital pretty tightly here at the group. So there might be a benefit in it, but we're not going to upgrade any guidance.

Okay, thank you very much for that, Matt. So, Duncan, over to you on the VA. On the VA, so 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 expectations, and importantly, a satisfactory financial outcome. And 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 throw into our normal capital management policy.

So nothing specific to that there.

And our normal capital management policy, Fulham, is that we have a, you know, we want the units to be well capitalized with a cash flow for the holding company. that we maintain a range of half a billion to a billion five if we get above that range or you know then we have and we have capital we don't need for running the business the priorities to get that back to stockholders 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 bmp paraba please go ahead good morning thanks for taking my questions i have two on the

Two follow-ups on the variable annuities, please. Firstly, could you remind us the sensitivity to equity markets of some of the metrics you disclosed today on slide 10, especially on the operating capital generation and maybe some of the CT numbers as well? And secondly, if we look at this on the 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. So 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. And 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, of the published sensitivities that we have and that we always put in the press release. You'll see that they did not move a lot from the previous quarter. And that's largely a consequence of the base two. not so much what's happening in the reserve movements or the underlying guarantees. It really is in the base fees. Thank you very much, Matt.

And then the second question, Tuckett. Well, the financial implications of a transaction is indeed one of the primary inputs or 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 $150 to $200 million of for the next couple of years, bearing in mind that the book is falling by around 10% per annum in terms of natural withdrawals. And most of that, as Matt just highlighted, is from base fees. So, 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 150 to 300 million OCG new guidance, what was the impact of the lower base fees on the lowering of this number?

Don't really, maybe just maybe to answer it from a little bit of a higher level, total operating capital generation on the book was 61, I think, million dollars for the course quarter. That would have been a small amount impacted by the lowering of base fees during the course of the quarter.

But yeah, but it was relatively small.

Thank you. We will now take our next question from Michael Hutner from Bernberg. Please go ahead.

Fantastic. Thank you very much. The, on the slide 30, you showed the base assumptions. I just wondered what's the sensitivity of that VA book the main metrics to the interest rates because we're now higher than the interest rates in the u.s um and the other question is on u.s mortality i think you've got a one trillion um dollar total exposure i just wonder if you can give a little bit of color to that uh which portfolios is it in the va or is it in universal life and how should we expect it to um affect i mean Not a worst-case scenario. It's a worst-case scenario that could be unmanageable. But, you know, relative to what you've seen in Q1 and also last year, how would you view the emergence of that mortality risk compared to the original assumption in 2020? Thank you.

Pat, over to you. Maybe I can take your first one. So 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 or financial reasons. In terms of the mortality risk, I think that's specifically for the life block. Is that how we want to think about it? Right now, we have seen, obviously, poor mortality experience as a consequence of COVID. You've seen in my opening remarks that 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 going to change any long-term mortality expectations at all because the results were really polluted by the COVID environment. I would say that this is going to be a similar kind of year. It's going to be very difficult to look through the long-term impacts of COVID on what our long-term management has done. So I want it to be continued, by the way, not just by us, but by the entire industry.

Maybe you can give just a figure would be really helpful, maybe just a results figure.

A reserve figure for what, the life block?

Yeah.

No, I got it. So, for the overall life block, think of it as $40 billion U.S. dollars, the entire life block in the U.S.

And that's the exposure rather than the reserve?

That's the IFRS reserve liability net of reinsurance on our books.

And 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. So reserves are always a combination of sort of accumulated value to the customer together with long-term mortality expectations. We can get more detailed. 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. Steven Hayward from HSBC. Please go ahead.

Thank you very much. Two questions on your plan or potential plan to come. Is there a preference for doing transactions with third parties on 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 capital generation of the book is around 150 to 200 million dollars that's you know 10 to 15 percent of your total operating capital generation if you're thinking about a potential disposal amount does that disposal amount Is it to make it an economic attractive deal for you, include the potential capital release, or is it just on the loss of OCG? Does that make sense?

So, Duncan, over to you. Thank you very much, Steve, for your questions. I think, Stephen, you've hit on two of the main problems, actually, which we ourselves are considering internally. So on the first part about specific blocks of business, I'm not going to 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 form so this will be something which is complicated which will take some time and 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. And 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 it's still reasonably substantial. versus the loss of capital generation going forward. And 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 a knock-on implication that as you take this look out, there could be other consequences on things like reserve floor and tree highlights, which we want to get a grip with, which are manageable.

Okay. Very good. Thank you very much.

We will now take our next question from Robin van den Fork from Mediobank. Please go ahead.

Yes, thank you very much for taking my questions. The first one is a bit of a clarification on the guidance. I think the 1.2 to 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. It's probably a key driver here. But I was also expecting that in the Netherlands, for example, I think maybe this is not for Q2, but for Q3, we should probably see some further release into OCT from UFR Directive and what rates have done pretty parallel in a quality date. So 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. And also in relation to that, with the VA book, your run rate was 250 to 300, I think, last quarter. So it's gone down, which I guess is given by the lump sum and the 10% gradual rundown. But can you talk a bit how these factors are embedded in that guidance? And last quarter, you were also very kind to provide some insights on how to think about 2023. So if you can, yeah, sorry, 2023. So it would be very helpful to get that same picture again. And a little bit in relation to capital generation. I think in the Netherlands you're using long-term return assumptions. And 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 OCD for the Netherlands? Thank you.

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? I'm only kidding. I'll do all of them. So on the first one, on the operating capital generation guidance, the 1.2 to 1.3, is not a downgrade. In fact, we had guided toward 1.2 last quarter. Now we're upping that guidance. And again, depending on how the year ultimately shakes out with respect to markets and mortality, then we'll see where it ends up. So in general, if you look at basically the run rate of 300 million that was implied from the guidance last year, or I'm sorry, last quarter, we're maintaining that $300 million, effectively that guidance for the next three quarters, despite the fact that we have equity market declines that are fairly material. So I would in no way consider that to be a – I would not consider that to be a downgrade. The next one, so on the Netherlands, what's happening with operating capital generation, actually the yield curve movements have not been paralleled. So that's the reason why you didn't see really a decline in the solvency ratio of the life company. So 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 usually what we have said is that in normal years we reinvest something like $4.5 to $4 to $5 billion as a consequence of debt rolling off, and we have to reinvest that. And 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. But 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. So in general, while up interest rates are actually quite good for us in the medium and long term, short term, we're not going to see so much of a benefit from the rising rate, just because we don't have so much liquidity to invest. So for the next couple quarters, you're not going to see much of a movement in that one. Long-term good, short-term, it's not really going to have so much of an impact. Now, on the VA side, yes, indeed, last quarter we had guided for 250 to 300 million run rate on operating capital generation. Now we're saying, and you can think of it really as, we expect to get about 200 million over the course of 2022. And the runoff of the book will start to erode that. So we think from 200 maybe in this year, in three years' time, maybe 150, something on that order. But we are getting hit probably more by fees in the long term. So 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. But really, it's going to be the decrease in the equity markets that are going to hit fees, and that's why that's going to 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, yes. So 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 a better reflection of a long-term capital generation. So we do it in this manner. Of course, so we're a little bit lower now, so 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. Yeah, so 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. 1.2 to 1.3 billion euro. 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 rate dynamics, I hear what you say. I think that's exactly true for Q1. But I think since Q2, the move has been more parallel and has been positive. So, Netherlands should probably benefit from some rate dynamics in the third quarter. And do I get, do I understand correctly, you don't want to entertain OCG thoughts on 2023 or?

I can, I know I can talk about 2023 guidance too. And you're, and you're right, by the way. So the, so in terms of the curve shifts, they were non-parallel during the first quarter, but then, so since then they've been, they've been up, you know, roughly, yeah, it's a little bit in parallel. For 2023, probably the best way to do this is to go off of the, so start with the 2022 guidance. So here we're going to be, again, 1.2 to 1.3. And then the things that, you know, if I were you that I would factor in, embedded in that is about 150 million euro worth of adverse claims experience due to COVID. So we think that hopefully by the time we get to 2023, We won't have to talk so much about COVID. So maybe add 150 million to that. And plus, we're going to 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 100 million euro a year. So that would be an uptick from 2022. And then finally, we have the, you know, you remember that there's normally a UFR reduction, 15 basis points. We reflected it in the in the quarter this year. But if rates stay kind of where they are, we're not going to have another rate reduction until 2024. So 2023, you can add another $100 million to operating capital generation. And then, 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. So hopefully, you know, over time, we're going to be not talking about so much UFR. So take our 2022 guidance, add 350, and that gets you in the ballpark for 2020.

So the 1.2 to 1.3, that actually sort of ignores the exceptionals of the beat in Q1. Is that how I should look at that guidance?

No, that's a four-year. So that takes into account the exceptionals in 1Q. And then 300 million run rate guidance for the balance of the year should be back for it.

Okay. Thank you very much for the call. Very helpful.

We will now take our final question from Mahvib Akhmas from UBS. Please go ahead.

Hi. Thanks for taking my questions.

Sorry for coming back to the variable annuity block potential transactions. I'm not sure if you can say much more on sort of your preference in terms of reducing guarantees versus sort of generating value. I don't know if you're reducing your guarantees on the books. That comes at a cost. but also reduces your potential cost of equity. And then just the size of the book is quite large. So presumably if you can, you said you might do part of a transaction. So presumably that's kind of one of the reasons 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, that's about 30 billion, I think. And then just on the runoff of 10%, that doesn't include any long-term sort of markets gains on the account value. So you should have minus 10% of some assumption on long-term sort of equity value gains as well, offsetting that. And then the second question on sort of, there's an assumption change in Q2 on long-term volatility in the variable annuity book. So I think there's a negative impact on the RBC ratio, but does that improve your OCG going forward as well? Thanks.

Your question on the VA block, I interpret that to mean what is your criteria versus risk reduction, capital generation, et cetera. And 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 tradeoffs between capital generation, risk reduction, stability, knock-on implications, just as I am under the presentation. And 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 this is a complex deal. This will be a complex transaction. It does require a lot of resources on our side and presumably also on the counterparty side. So that means that any transaction would need to be meaningful, make sense, and justify that workload. But 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. So it would need to be meaningful, but unlikely to be the whole book. And then just quickly, the runoff of 10%, indeed, there will be an offset from account value appreciation. As I highlighted in the presentation, we assume an 8% total equity return, and that will provide an offset there. I'll hand to Matt now for the fly ball.

Maybe I can take the second one first, just in terms of the runoff of the book. It's about a $78 billion pay. We would expect to have that number run off about 10% over time. So 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, we have – so in QQ, we will set a higher – a long-term volatility assumption – than what it is today. And the reason why we do that is we want to stabilize the RBC ratio going forward. At this point in time, we would think that that would have about a five percentage point negative impact on the RBC ratio in 2Q. But 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. So 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. But in terms of very high spikes in the implied volatility, we're protected on the solvency ratio, which is the reason why we do this.

Perfect. Thank you. That's very helpful.

But right before we close off, I would like to hand over to Mark for some closing remarks.

Yeah, so 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 Agon Group. And 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, 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 that 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. And with that, I want to thank you for your time today, for your attention to the company, and for your questions. And I wish you a very good day. And Yamil and the team will be ready to support you in any follow-up questions you may have. Thank you very much.