Aegon Ltd. New York Registry Shares

Welcome to the Agon second quarter 2022 results conference call for analyst investors. Today's call is being recorded. At this time, I would like to turn the conference over to Jean Willem. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining this conference call on Agon's second 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's CEO, Laert Friese, and CFO, Matt Ryder. After a brief update on our results by Laert and Matt, we'll open the floor to Q&A. Let me give the floor to Laert.

Thank you, Jan-Willem, and good morning, everyone. The first half year of 2022 was challenging for investors, with equity markets experiencing their worst start of the year in over five decades. Volatility remained as the war in the Ukraine continued and central banks increased interest rates to curb rising inflation. Against this challenging backdrop, we performed well, a testament to the strength of our strategy. Despite the impact from lower equity markets, our second quarter operating result was strong. This reflects the receding impact of COVID-19 and the progress we are making on our operational improvement plan. We delivered further savings and continued to build on our growth initiatives. In our strategic assets, we maintained commercial momentum even in a challenging market environment. Agon's net result was impacted by a one-time charge due to reinsurance rate increases in the United States. Nonetheless, we remain on course to deliver on our objective of growing returns to our stockholders. Our balance sheet is strong with the capital positions of our three main units above their respective operating levels. Cash capital at the holding stands above the operating range. Together with the growth in free cash flow, This is a solid basis to raise the interim dividends to 11 euro cents per common share. We also continue to make progress on our approach to sustainability. As part of our efforts to contribute to a climate neutral world, Agon Asset Management partnered in the launch of a 600 million US dollar venture to acquire multifamily dwellings and transition them to low carbon, energy efficient buildings in the US. In the recent months, we moved over 3 billion pounds of assets from our UK customers into strategies that consider ESG credentials. This is part of the commitment to achieve net zero carbon emissions in the default investment options of our UK pension administration platform by 2050. Based on the progress we have made on our transformations so far, we are comfortable increasing our expectations for cumulative free cash flow over the period 2021 to 23 from a range of 1.4 to 1.6 billion euros to at least 2.2 billion euros. We are also raising our expectation for operating capital generation in the units for 2022 to around 1.4 billion euros. So let us move to slide number three. You can see that we continue to progress with the execution of our operational improvement plan. We have now implemented 1,558 out of more than 1,200 initiatives as part of this plan. Just in the last three months, we finalized about 120 initiatives. Expense initiatives resulted in a reduction of our annual addressable expenses of 250 million euros in the trailing four quarters. We continue to experience inflation headwinds But so far, we've been able to absorb these and further reduce our expense base towards our goal of 400 million expense savings. And I remain confident that we will reach this target by 2023. We are also increasingly seeing the benefits from our growth initiatives. The 240 growth initiatives that have been executed so far have had a positive impact on our operating results. Over the trailing four quarters, growth initiatives contributed 215 million euros to the result. We will, of course, maintain an intense execution rhythm to further implement our operational improvement plan in the coming quarters. So let's turn to slide four to discuss the progress of 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. As you can see, new life sales increased by 12% compared with the second quarter of last year. This was supported by the World Financial Group distribution channel, which benefited from a 12% growth in the number of licensed life agents compared with last year. In the retirement business, Transamerica aims to compete as a top five player in the new middle market sales. Written sales were approximately $850 million this quarter, while net deposits for the middle market increased to $467 million, benefiting from strong written sales in prior periods. We have further expanded our suite of financial wellness solutions in the workplace business, by introducing a product called Emergency Savings Account. The product enables employers to help their employees save for unexpected events and improve their financial well-being. When we turn to slide five, we're looking at the performance of 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, a decrease compared with last year due to reduced financing activity in the market of increasing mortgage interest rates. Nevertheless, mortgages under administration continue to grow, increasing over 3 billion euros compared with last year to almost 62 billion euros. We also continue to consistently grow our workplace business. Net deposits for defined contribution pension products amounted to 191 million euros in the second quarter of 2022, which is nearly on the same level as in the prior year quarter. Moving on to the United Kingdom, we saw the platform business generated net deposits of 317 million pounds across the workplace and retail channels. Net deposits on the platform positively contributed to revenues, but were more than offset by revenues lost from the gradual runoff of the traditional product portfolio. Expense savings initiatives offset the impact from market movements on assets under administration, leading to a stable efficiency ratio of the platform. On slide number six, we see that our asset management business saw third-party net outflows in the global platforms amount to approximately 800 million euro, reflecting the challenging market conditions. Continued net deposits into the Dutch mortgage fund were more than offset by outflows in other asset classes, as we saw customers freeing up liquidity in a rising interest rate environment. The operating margin of global platforms decreased by around two percentage points to approximately 12%. On a constant currency basis, lower revenues due to adverse market conditions more than offset expense savings. Our strategic partnerships and asset management continue to perform well with net deposits of more than 1.1 billion euros. Performance fees normalized from their exceptional high level last year. This is why you see the operating result from strategic partnerships decrease to 36 million euro. In our growth markets, Agon is investing in profitable growth. New live sales from these markets increased by 5% to €55 million, and non-live sales grew by 8% to €31 million, both mainly due to sales growth in the Bank Assurance channel in Spain. In summary, we've performed well against a challenging backdrop, which is a testament to the strength of our strategy. Matt will now talk you through our financial results for the second quarter in more detail. Matt, over to you.

Good morning, everyone, and again, welcome and thank you for joining us. Let me start with an overview of our second quarter financial performance on slide eight. As you can see, Agon's operating result decreased by 11% on a constant currency basis to 538 million euros. Lower fees in part due to adverse market movements and lower investment income more than offset the benefits from favorable claims experience, growth initiatives, and expense savings. Addressable expense savings for the trailing four quarters totaled 250 million euros compared with the full year 2019 expense base. Operating capital generation before holding funding and operating expenses was strong at 391 million euros and included net favorable claims experience. The decrease in operating capital generation versus last year reflects the impact of actions we have taken to both release capital and improve our risk profile. These actions have led to an improvement in the quality of our capital generation and support the growth in free cash flow to 318 million euros. Cash capital at the holding decreased only slightly to 1.7 billion euros, despite the more than 500 million euros in cash that we spent on deleveraging and the first tranche of the share buyback program during the quarter. We have reduced our gross financial leverage to 5.7 billion euros, or 5.4 billion euros based on a US dollar exchange rate of $1.20, which is the rate at which we set our deleveraging target in 2020. This means that we have reduced our gross financial leverage to within the range of 5 to 5.5 billion euros, the target that was set to be accomplished by 2023. Our balance sheet remains strong with the capital positions of all three of our main units remaining above their respective operating levels. The group Solvency II ratio increased by four percentage points over the second quarter to 214%. Turning to slide nine, we saw the second quarter operating result come in at 538 million euros. Lower results in the U.S. in asset management were partly offset by increases in the contribution from other units. The 16% increase in the operating or decrease in the operating result in the U.S. was driven by lower fees due to adverse market movements and outflows in the U.S. variable annuity business. Claims experience in the second quarter was favorable and broadly in line with last year. Mortality claims experience was a favorable 5 million euros in the quarter. This included 10 million euros adverse experience related to debts that were directly attributable to COVID-19. This was more than offset by favorable experience from other causes of death. Next to that, favorable morbidity experience in the long-term care book amounted to 27 million euros. This included the release of the remaining incurred but not reported reserve of 16 million euros. In the Netherlands, our operating result benefited from provision releases in the non-life business. This was driven by both an exceptional level of recoveries and a low number of new claimants than expected in the disability income business. These items more than offset lower investment income in the bank and the life business, which is in part driven by the sale of corporate bonds to protect our liquidity position in a rising rate environment. Agon UK and Agon International both performed well. The increase in the operating result of the UK reflects a one-time benefit in fee income, net of hedging, and a reduction in addressable expenses. Growth in Spain, Portugal, and Brazil, as well as favorable claims experience across the region, contributed to the 72% increase of the result of Agon International. Finally, the asset management operating result decreased by 31%, mainly driven by the normalization of performance fees in the Chinese asset management joint venture. The operating result from the global platforms decreased slightly, driven by the impact of adverse market conditions on management fees and lower other revenues, partly offset by expense savings. Now let's turn to slide 10 where you can see that our net result amounted to a loss of 348 million euros in the second quarter. Non-operating items totaled a loss of 450 million euros driven by fair value items and realized losses on bonds. Fair value items were mainly driven by the interest rate hedges for the U.S. variable annuities with GMDB and GMIB riders. This program hedges the economic liability. However, under IFRS reporting, the discount rates for liabilities are locked in, which leads to an accounting mismatch and resulted in a fair value loss as a consequence of the increase in interest rates during the quarter. These hedges continue to effectively protect Aegon's capital position against market movements. Realized losses on bonds amounted to 226 million euros. These were sold to protect the liquidity position in a rising rate environment. Other charges amounted to 522 million euros, primarily resulting from 192 million euros charged from reinsurance rate increases, as well as a 159 million euro charge for various assumption updates in the Americas. Other drivers included a book loss of 84 million euros from the sale of Agon's business in Turkey and one-time investments related to the operational improvement plan, which added up to 69 million euros. And now moving on to slide 11. Here you can see the solvency ratios of our three main units ended the quarter above their respective operating levels. The U.S. RBC ratio decreased 8 percentage points over the quarter to 416%. A sharp decline in equity markets in the quarter reduced the ratio by 29 percentage points. Furthermore, the previously announced adoption of a long-term implied volatility assumption reduced the RBC ratio by 4 percentage points in line with our previous guidance. Management actions partially offset these items in the second quarter. We made updates to the modeling of indexed universal life reserves, which was possible due to a multi-year model enhancement program. This positive impact on the ratio was partly offset by the recapturing of liabilities from a captive reinsurance company. In the Netherlands, the Solvency II ratio of the Dutch life unit increased 200%. The increase was mainly a result of a reduction in required capital, including from an update to our internal model and from the sale of bonds to protect our liquidity position in a rising interest rate environment. Market movements had a neutral impact as the negative impact from higher spreads was offset by a positive impact from interest rates and other market movements. Interest rates had a more favorable impact than our sensitivities would have suggested. This is the result of the magnitude of the interest rate increase and cross-effects with other market movements. The solvency ratio of Scottish Equitable, which is our main legal entity in the UK, increased by one percentage point to 178%. On slide 12, you see that cash capital at the holding decreased only slightly during the quarter to 1.7 billion euros, despite the successful completion of our 400 million euro debt tender. Next to that, we executed the first 100 million euro tranche of our 300 million euro share buyback program this quarter. Gross remittances from our business units and the proceeds from the sale of the business in Turkey contributed favorably, keeping the cash position above the operating range. We will spend part of this cash on dividend payments and buybacks during the remainder of the year. The second tranche of our share buyback is underway, and we announced today that the third tranche is expected to commence in October of this year. Slide 13 shows the results of our financial assets, where we continue to take actions to maximize their value. As we shared with you last quarter, we are now directly engaging with third parties to discuss a potential reinsurance transaction on parts of the variable annuity portfolio. Let me remind you that the outcome of those external engagements and the tradeoffs to be made as part of a potential transaction will be weighed against the alternative of continued full ownership and active management of the now de-risked variable annuity portfolio. As soon as we have more to share on the outcome of this process, we will update you accordingly. As part of the ongoing active management of this block of business, we adopted a long-term implied volatility assumption for the valuation of variable annuity guarantees. The adoption of a long-term volatility assumption will better protect Transamerica's capital position against short-term market dislocations. Furthermore, Transamerica is taking actions to reduce the basis risk between underlying investment funds and hedge instruments. To this end, enhancements have been made to our hedging program in the second quarter, which will further increase the predictability of cash flows from the variable annuity portfolio going forward. We continued our track record of successfully hedging the targeted risks embedded in our variable annuity guarantees. The dynamic hedge program achieved the hedge effectiveness of 98% this quarter. On long-term care, we have progressed well on the enforced management of this book. In the second quarter of 2022, Transamerica obtained regulatory approvals for additional rate increases of 23 million U.S. dollars, bringing the value of approvals achieved since 391 million U.S. dollars. This means that we have achieved 87% of the $450 million rate increase expectation. Long-term care claims for the second quarter came in at an actual to expected ratio of 75%. This includes the release of the remaining incurred but not reported reserve that was previously set up for delayed long-term care claims. Excluding this release, the actual to expected claims experience for the second quarter of 2022 would have amounted to 88%. The claims experience mainly reflects increased claims terminations as a result of higher mortality, while new claims return to pre-pandemic levels. As you know, our aim has been to turn our Dutch Life business into a low-risk cash generator paying predictable regular dividends. This quarter's operating capital generation of 79 million euros comfortably covered the 55 million euro remittance to the holding. To reduce the sensitivity of the ratio to steepening of the interest rate curve at the longer end, NL Life updated its interest rate hedging program in the second quarter. Now let me turn to my last slide. I'd like to briefly walk you through an overview of our achievements since the Capital Markets Day in 2020 that have strengthened our capital position. We have reduced our exposure to financial market risk. We have maintained the capital positions of our three main units and cash capital at the holding above the relevant operating levels, despite market volatility. We have reduced our gross financial leverage to within the targeted range, a year and a half ahead of schedule. The active management of our balance sheet and the overall progress we have made to transform Agon allow us to increase our outlook for free cash flow. Barring unforeseen circumstances, we now expect to achieve at least 2.2 billion Euro cumulative free cash flow over the period 2021 to 2023. of which approximately one-third of it will come in 2022. This is well ahead of the 1.4 to 1.6 billion euro target range that we had provided at the 2020 Capital Markets Day. This outlook is supported by operating capital generation from the units. Operating capital generation benefited from strong business performance one-time items and more favorable claims experience in the first half of the year. Following the strong performance in 2022 year-to-date, we now expect to achieve operating capital generation of around €1.4 billion for the full year. This compares to the guidance of around €1.2 billion that we provided at the fourth quarter 2021 results. And with that final note, I now pass it back to you, Lard, for the wrap-up.

Thanks, Matt. On slide number 16, I'd like to end our brief update by repeating that while uncertainty in the financial markets and economic outlook is expected to remain, we will continue to stand by our customers and help them navigate through the challenging economic circumstances with our expertise and high level of service. I also want to thank our colleagues for their continued dedication. and I am confident that together we will deliver on our 2023 strategic and financial commitments. I would like to open the call now 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 one to ask a question. We will now take our first question from Andrew Baker from Citi. Please go ahead.

Great. Thank you for taking my questions. So the first is on, I guess, on free cash flow and dividends. So free cash flow expectations are now obviously significantly higher. Was there any thought of increasing the 25% DPS target by the end of 2023? And then secondly, just on OCG, are you able just to walk the bridge on your thinking of how you get to the 1.4 billion obviously in the second half performance? And then really, has anything improved in your outlook for the second half? Or is it really just a reflection of strong 2P performance? Thank you.

Yes, Andrew, thank you very much for your questions. I'll answer the first one and then hand over to you if you don't mind, Matt. On your, yeah, we're very pleased to see that the strength of our capital positions and the way we run is allowing us to increase our free cash flow outlook and also our operating capital generation outlook for this year. The progress that we have made on strengthening the balance sheet and growing that free cash flow today has allowed to accelerate our dividend trajectory compared with the expectations that we had at the time of the capital markets day. For 23, we expect a level of sustainable free cash flows that will allow us to further grow the dividend per share to around 25 euro cents.

Matt? Matt? Yeah, I'll pick up the operating capital generation for 2022. So the way to think about this is in the second quarter, we reported 391 million of operating capital generation. Now, that included about 56 million in favorable claims experience and other one-time items in the U.S. and in the Netherlands. So if you deduct that, it gets you to a clean number for the quarter. of about 335 million. So, if you kind of take 335 million times two quarters for the next two quarters, add that to the year-to-date operating capital generation that we reported of 776, and that gets you to a number that's a little bit north of the 1.4 billion that we're guiding.

Thank you.

We will now take our next question from Michelle Balotor from APW, please go ahead.

Yes, thank you for taking my question. So I have two questions. The first one is on the RBC ratio. I don't know if you can give us more details about the a breakdown of what was the negative impact from the market's volatility and the positive impact from management action and exactly maybe a little bit explore, give a little bit more color on these actions. But that's the first question. The second question is about the free cash flow. So, of course, I mean, the way you determine the free cash flow depends on variety of factors but to what extent free cash flow depends on your IFRS numbers and if it does therefore we can I mean you highlighted some level of confidence today about the you know the effect that IFRS 17 may have on on this factor in 2023. Thank you.

Yeah, thank you, Michele.

Matt, you take both of them? Thank you. Yeah, thank you for the questions. On the first one for the RBC ratio, I mean, we saw some big moves, obviously, because of markets during the course of the quarter. So if you look at just the effect of markets, it ended up being about 33 percentage points negative That's mostly driven by equity market movements, and that was pretty much in line with our sensitivities that we had put out there. But there were some management actions that we had taken. They totaled about 25 percentage points during the course of the quarter that were quite important. And I would say that that highlights our commitment to active capital management. This is what we are doing. There were some puts and takes mainly on management actions giving a positive to the RBC ratio, but actually those management actions had very little effect on the operating capital generation outlook going forward. So on that standpoint, I think that we did a good job during the quarter managing the capital base. On the free cash flow, I would just remind everyone that the free cash flow, it's a very simple definition. It's the remittances from the business units minus the holding and funding expenses at the group level. So when you ask the question about how much does it relate to IFRS or IFRS 17, the answer is not. These are simply the result of the solvency capital regimes in each one of the units that we're doing business in.

Thank you.

We will now take our next question from David Barma from BNP XM. Please go ahead.

Thank you, and good morning. Just to come back on your answer just now, Matt, on free cash flows. So based on your revised targets, I think the remittance payout ratio over operating capital generation moves up slightly to the high 60s. Can you explain what the remaining gap between the two, where it comes from, and what do you need to see to improve this further in the future? That's my first question. And then, secondly, on the U.S. retirement plan business, so it seems like the margin level on this unit continues to be either pressured or flat versus previous periods. When do you think we'll start seeing in the margin numbers the efforts you're taking in what I think is a more profitable middle market segment? Thank you.

Thanks, David. Matt, I'll pick up the first one. Right now, you've got the numbers right on the convergence between the operating capital generation and the free cash flow. There are a couple things that we have to make sure that we take into account. One is we want to make sure that there's sufficient capital in businesses, especially the U.S. business, to make sure that they can execute on their growth initiatives because that's our goal here is to grow the strategic assets. So there are still some investments that we're making in the operational improvement plan that causes a little bit of that gap. We also want to make sure that we take into account future uncertainty with that free cash flow guidance that we have given for the three-year total, we are kind of factoring in a thought that credit risk could be heightened over the remaining period in that target. So we've assumed that roughly one and a half times our normal level of credit impairments. So those are some of the reasons. So we would expect that to converge, operating capital generation and free cash flow.

Yes, and David, on the retirement plan. So first of all, this is all about scale. We focus on the middle market in retirement plans. We do compete also in the large case market, but only on a more opportunistic basis. And the reason for that is that we believe that our ability to extract better margins is in the middle market, where actually also our our existing market position is a very good one. You have seen over the last quarters that we were able to grow continuously in our middle market retirement plan space. And even in this quarter, we were able to post net deposits again in that market segment. So this is going as we expect it to go, which is step-by-step improving and getting more scale in that chosen market segment, where we operate currently in the position of strength as a top five provider in terms of the number of new middle market retirement plan customers. And we've onboarded roughly 4,400 new cases in the last 12 months. And And, of course, the flows of that will come through in the coming periods in full. So, again, we're doing well, but it's a scale question, and we need to continue to drive our growth up in the middle market space, which, by the way, we have seen consistently over the last four years is improving.

Thank you.

We will now take our next question from Michael Hutner from Birnberg. Please go ahead.

Fantastic. Thank you so much. I have two questions. Two and a half, so maybe we'll cut it to two. The first one is on mortality. So I think in the budget there was 75 million left for the second half, but the mortality trends at the moment are so positive. I just wondered if you can say how you see the balance of charges in the second half. And the second is we have these one-off items in the net profit level, $192 million for reinsurance and $159 million for various assumption changes relating to North America. I just wondered whether you could give a little bit more color as to what this relates to. Is it hedging costs or rates or mortality? I don't know. It's just interesting. Thank you.

Thank you very much.

These are amazing numbers. And please, can we have more buybacks? Sorry. Sorry.

Thank you for the suggestion, Michael.

And thank you for the question. You are right, Michael. So the mortality in the second quarter was actually pretty good. So we see a reduction, obviously, in COVID-related claims down to about $11 million during the course of the quarter. And that was based on 34,000 U.S. population deaths in the second quarter. By the way, that number had reduced dramatically from 150 really see the effects of COVID on real mortality coming down. Our outlook for the balance of the year is perhaps something like 40,000 U.S. population deaths due to COVID. That translates into about $20 million a quarter in adverse mortality. And for the rest of it, let's see how the experience goes for the remainder of the mortality claims in the U.S., But again, for the second quarter, they were actually pretty good. Maybe I touch on the two charges that you had mentioned. The first one, the 192 that related to reinsurance, was an action by one of our reinsurers to increase YRT reinsurance rates on a significant block of business or significant blocks of business that we had reinsured with them. So that's where you're getting that one. That has very little impact on the RBC ratio in our statutory books, but it does have an ongoing drag of about $40 million in operating capital generation per year that will decline over time as the book matures. That was purely related to mortality experience. And this is going back on reinsurance agreements and policies that were written decades ago. And this was one where it was better. Let's say mortality expectations now are very different than what they were back then. The assumption charges, the charges related to the assumption update in the second quarter in the U.S. were actually quite modest, I think. On an IFRS basis, you mentioned the $159 million number. It actually has very little impact on ongoing operating capital generation, very little impact on the solvency ratio for the U.S. businesses. And it was a mix of things. I think we updated maybe 70-some-odd assumptions. They're very small. One example would be, for example, premium persistency on contracts. We updated for, let's say, universal life-type contracts where we saw that people were paying higher premiums when they had lower account values, so it keeps the contract in force for longer. So that would be one example of the... one example of one of the updates that we had made. One thing that we did not do during the course of the quarter was we did not look at COVID-19 mortality experience during the experience that we've had during the pandemic. Most insurance companies don't really know what to do with it. So we're basically throughout the data set and the assumption was related to many other things, but not generally population mortality. I hope that answers your question.

That's really helpful. Thank you.

We will now take our next question from Robin van den Beek from Mediobanka. Please go ahead.

Yes, thank you. It's Robin van den Beek. A follow-up question on free cash flow. I think if you break it down over the years to 2.2 billion, I think you're sort of getting to an equal level per annum. So I appreciate the commentary you made on one and a half times the normal level of the credit impairments, which is a 10 bps impact on a $60 billion book. So that's only 60 million, but it feels like you're still holding something back. Can we assume that maybe the at least is a level of conservatism? That's the follow-up question. Then on OCG, I was just wondering if you could give us the bridge for 2023 on moving parts so far. You mentioned the reinsurance repricing, which has a negative impact, I guess, on OCG next year. You've got the Euro 4 falling out and, of course, a lot of macro movements quarter to date. So that will be very helpful to get some more visibility there. And the second question is around secondary guaranteed universal life. One of your peers in the U.S., I think on the back of a private study, yeah, made some assumption changes in relation to that book. I was just wondering if you could explain what that entails to and to what extent that could be a future action for yourselves. Thank you.

Take the first one. So on the, let's say on the free cash flow guidance, and I think your question was really do we have conservatism built into that 2.2 billion number? One thing that I can say is that, so what do we have in it? Just to let you know, we have assumed that the Dutch Life business will pay a growing dividend. What we see is their capital generation capacity is going up, and we would expect them to pay a bit of a growing dividend. What we also would expect is that the U.S. remittances would remain stable. And this is an important one because we're still trying to invest in the strategic assets part of the U.S. business. to be able to propel organic growth. So that's a key thing. The other one is that, you know, I think I had mentioned that we had benefited from the first half of the year from special dividends that we're getting out of some of the companies, primarily the UK and TLB. But we have not baked in any material kind of special things for the balance in the year. So I don't know if you would call that conservatism or that's just what we have baked into the north of the 2.2 billion guidance. As far as operating capital generation for 2023 goes, so we tried to give you some guidance for 2022 to say that we would get to about 1.4 billion euro of operating capital generation in the business units. And there are a couple moving parts that you need to take into account for 2023. So, the first one is, and I think you're familiar with this, the UFR, the ultimate forward rate under Solvency II is not going to decline in 2023 next year. That 15 basis point decline that we've been suffering from each year, and that ends up Giving a benefit of about a hundred million euro and operating caption relative to this year Additionally, you know, we talked a lot about the operational improvement plan and number of initiatives and the expense savings and all these things But ultimately it's important that this stuff come through in the operating capital generation. That's what we would expect for 2023 that we would have some tailwinds from those and successful completion of those initiatives to the tune of about €100 million. And then I previously mentioned, you know, with respect to the YRT rate increases on reinsurance, I mean, just round it, just say that it's maybe, you know, between all the management actions whatsoever, you know, maybe €50 million headwind, so negative relative to 2022. One thing we would expect, though, is that we would get, we expect that there will be a normalization of U.S. claims experience that we've seen in 2022, but we expect that at this moment to be offset by the non-recurrence of favorable experience in other units, like you saw, you know, for example, in this quarter in the Netherlands, among others. What we are not doing is providing a more detailed OCG outlook for 2023 given the fact that we have a lot of macroeconomic uncertainty and obviously we're making a lot of investments to grow organically in the strategic assets part of the business. But what you can say is that the level of operating cap gen is really a good basis for the units to pay the planned remittances to the holding and to invest in creating competitively advantaged businesses if we see opportunities to accelerate organic growth. Secondary guarantee UL. So, you know, for us, we review our assumptions in the second quarter, and we again reviewed lapse assumptions in this type of business. Based on our experience, we saw actually no reason to change them. And in fact, we have, you know, actually very low lapse rates among especially the sensitive blocks of business where lapse rates tend to really matter. I think most people on the call will recognize that this is particularly sensitive for one, older age population, two, higher face amounts, and three, if contracts are in the money, then you can have very low lapse rates. And that's where we have actually quite granular modeling and have been routinely updating these assumptions over time so that for those sensitive blocks of business, We have all, they're very close to zero, very close to zero lapse rates. So this is not, the lapse issue is something that we're routinely updating, but this is not an issue for us.

That's great, Collar. Thank you very much.

We will now take our next question from Nazib Ahmed from UBS. Please go ahead.

Thanks for taking my question. So first one on the US variable annuity book, I appreciate you may not be able to say anything more since 1Q. But if there's any update on how your internal process is going in terms of preparing the book and how your conversations are going with the third party, that'd be great. And then secondly, again, on the 1.4 billion OCG, so Matt, you said 350 times that by two, and then maybe there's about 40 million of COVID excess mortality that you're expecting, and that kind of gets you to the 1.4. Is that correct?

Thanks. Thank you very much, Naseeb. Let me take the first one on the VA book. You know, we've been very transparent Updated you regularly on the steps that we are taking on that the able can be happened taking We said that we would look at all options rating ranging from potential reinsurance transactions to continued full ownership of this now dearest portfolio and you know what if we have more to share about this will provide an update at this point we're working on it and and in general we don't comment on on this in this period. So the moment we have something to share, we'll go back to you.

Matt, over to you. Yeah, I think you have it right on the OCG guidance for 2022. The one thing I would mention is that COVID claims are actually coming in, you know, for the balance of the year. They're going to be relatively small. And frankly, we would expect them to be more experience, so that's not really a factor. You can get to something north of 1.4 quite easily without factoring in the sort of mortality and morbidity experience for the second half of the year.

Perfect. Thank you.

We will now take our next question from Sudha Rashad Batra from Society General. Please go ahead.

Hi. Just one question from my side. On your cash at holding or your excess cash, given your current levels and the upgrade in the FCF guidance, you are easily going to be above. You're going to easily be above the 1.5 billion, 0.5 to 1.5 billion target range. So, I mean, how should we start looking at, you know, the surplus cash? I mean, what are the actions that you could take? Any color on that? Yeah. Thank you.

Thank you very much, Siddharth. I'm going to take this one, Matt. So, you know, we have a clear policy for this, which is that if there's surplus cash capital above and beyond what we need to execute on the transformation of the company, then our first priority remains to return to stockholders over time, and that's most likely done in a form of buybacks. And as you know, we have a – we've given you guidance on how we want to keep the cash buffer between half a billion and a billion and five. We are active in buybacks. I mean, and we take this commitment seriously as demonstrated by the fact that we have launched a buyback program announced earlier this year and that underscores the commitment to return that surplus cash to stockholders. We will spend roughly $200 million, I think, on the last two tranches of this program, of which today we announced that the third tranche will start in October in the balance of the year. And also, please don't forget that we will return 400 million to stockholders through the payment of last year's final dividend and the interim dividend that we announced today.

Thank you. We will now take our next question from Steven Haywood from HSBC. Please go ahead.

Good morning. Thank you. On the Netherlands, you mentioned the sale of bonds to protect the equity position in rising rates. Can you explain what's going on here? Do you anticipate higher redemption, so your liquidity has to be higher than it was at the end of the first quarter? Or is the Dutch business remitting too much up front and waiting for actual cash to come out of the business over time? I mean, selling the bonds will obviously lower your operating capital generation from the Dutch business. Is this material? Can you give us an indication? And obviously, the selling of the bonds has increased your SOMC2 ratio in the Netherlands. How much was that contribution to the SOMC2 ratio increase versus other model updates here? And then secondly, just a quick one, if you can, how much of the free cash flow and OCT increase in outlook comes from foreign exchange moves to the U.S. dollar increasing significantly.

Thanks. Thank you. Matt, can you take those? Yeah, let me take the first one. So, the short answer on this is that the Dutch life business has a lot of hedging positions out there to protect against lower interest rates. We need to do that in order to protect the solvency two position of the company so that when you have rising interest rates, particularly quickly rising interest rates, to the tune, by the way, in Euroland of about 100 basis points during the course of the quarter, that means we have to fund collateral needs against the derivative positions that we have to protect the solvency balance. So, in fact, during the course of the quarter, we sold about 6 billion Euro worth of bonds And as you mentioned, that did reduce the solvency rate or increase the solvency ratio because you lose the solvency capital requirement, the SCR, on those bonds. That had an impact of about eight percentage points on the ratio. Now, in fact, we have – so this is a big deal for all insurance companies, by the way, is that the quarter was a story of managing liquidity. And we have been able to incredibly successfully do that. well, we have plans in place to be able to do this and we manage it well. So that did reduce the solvency or increase the solvency ratio because of the sale of those bonds. Model updates had a positive impact of about six percentage points on the Dutch life solvency ratio. It had mainly to do with having a certain infrastructure related equity investments included in our partial internal model. So that was an important movement during the quarter. But otherwise, the rising level of interest rates actually has done a lot to increase the operating capital generation outlook for the Dutch life business going forward. Now, at the end of June, I think basically the interest rate curve on which we hedged was very close to the like guidance of about 240 million euro operating capital generation in the Dutch life business on a run rate basis. So we've been able to manage the liquidity needs very well. And in fact, the rise in interest rates have enabled us to increase the guidance on the operating capital.

Thank you.

That was our final question.

I had one question on the U.S.

dollar strengthening. Oh, sorry about that. Yeah, so the U.S. dollar strengthening on the operating cap is a factor in there. I guess for every 10% change in the Euro-U.S. dollar, it equates roughly to about a 5% change in the value of the remittances that they

Could you just say again what the run rate of the Netherlands OCT was?

240 is what we're saying.

Okay. Thank you very much.

All right. Thank you, operator. This concludes today's Q&A session. So on behalf of Lars and Matt, I would like to thank you for the lively interaction. Should you have any remaining questions, then please do get in touch with us in Investor Relations. We're happy to help. Have a good day and thank you for your participation.

Thank you. That will conclude today's conference call. Thank you, ladies and gentlemen. You may now disconnect.