Earnings Call Transcript
AEGON LTD. (AEG)
Earnings Call Transcript - AEG Q4 2021
Operator, Operator
Good day and welcome to the Aegon Q4 2021 Results Conference Call for Analysts and Investors. Today's conference is being recorded. At this time, I would like to turn the conference over to Jan Willem, Head of Investor Relations. Please go ahead sir.
Jan Willem, Head of Investor Relations
Thank you, operator. Good morning everyone and thank you for joining this conference call on Aegon's fourth quarter 2021 results. We would appreciate it if you could take a moment to review our disclaimer on forward-looking statements which you can find at the back of the presentation. With me today are Aegon's CEO, Lard Friese; and CFO, Matt Rider who will take you through the key points of this quarter. Let me now hand over to Lard.
Lard Friese, CEO
Thank you, Jan Willem and good morning everyone. We appreciate that you are joining us on today's call and look forward to updating you on our fourth quarter results. Matt Rider is also with me today and he will walk you through the details of our results, our capital position, and the actions we have taken to maximize the value of our financial assets. In my part of the presentation, I will take you through the strategic highlights and the progress we have made on our strategic assets in the last year. So, let's turn to slide number two. In the fourth quarter of 2021, we made good progress in achieving our financial and strategic commitments. And I'm encouraged to see this reflected in our results this quarter but also when I look back at the full year. Our fourth quarter operating results decreased only slightly to €470 million despite adverse claims experience, which was mainly driven by COVID-19. The result was supported by increased fees from higher equity markets and a positive contribution from business growth. Throughout the year, we maintained an intense organizational rhythm to realize our ambition to transform the company. To date, we have executed 844 out of 1,200 performance improvement initiatives with expense initiatives representing the majority. As a result, we remain on track to deliver on our $400 million expense savings target by 2023. We continue to invest in the expansion of our distribution network, while simultaneously improving the digital experience for customers, advisers, and employers. This resulted in solid growth in our US life business, record high asset balances in our Dutch mortgage and defined contribution businesses, and net deposits on the core UK platform turning positive. In asset management we had our 10th consecutive year of positive third-party net deposits. However, there is still more work to be done for example in attracting more customers to our US retirement plan business. In the fourth quarter, we again released capital on attractive terms through the extension of the lump-sum buyout program for certain variable annuities in the US and the reinsurance of longevity risk in the Netherlands. We have also continued to improve our risk profile through a series of actions designed to reduce the volatility of mortality claims on a block of universal life policies in the United States. The capital ratios of all three of our main units ended the year above their respective operating levels, while the group Solvency II ratio stood at 211%. Active balance sheet management and enhanced performance has allowed the business units to increase remittances to the group, resulting in an increase in free cash flow. The sustainable growth in free cash flow allows us to grow our dividend. And therefore we will propose a final dividend for 2021 of €0.09 per common share at our 2022 AGM, bringing the full year dividend to €0.17. Following our commitment to net zero carbon emissions for our general account investment portfolio, we updated our exclusion criteria in early 2022 to further align our investments with this commitment. We've done a lot this year. But we knew that to be a company that delivers, we needed to also have people in positions with the right competencies, skills, and the right mindset to do just that. With this in mind, we have made several changes to our management team in the past 18 months. The appointment of Deborah Waters, as our new Chief Technology Officer; and Astrid Jäkel, as our new Chief Risk Officer complete the Management Board. Both appointments bring with them a wealth of experience and different perspectives that will further strengthen Aegon's strategic vision for the future. Lastly, we continue to work together with Vienna Insurance Group to close the divestment of our businesses in Central and Eastern Europe, which is still pending local regulatory approvals. As announced in December 2021, we have taken note of the fact that VIG and the Hungarian Government are negotiating a potential 45% participation by the Hungarian State in Aegon's and VIG's insurance companies in the country. So let me now take a look back over the full year 2021 on slide number three. 2021 was an important year for Aegon. We made considerable steps to improve our operational performance, reduce our risk profile and sharpen our strategic focus. Together with favorable markets, this has resulted in a strong delivery against the guidance we provided for 2021 at our Capital Markets Day. So let me take you through these five items one by one. We are targeting a reduction of our addressable expenses by €400 million in 2023 and wanted to achieve half of this by the end of 2021. We are progressing well and have already achieved an expense reduction of €244 million. On operating capital generation, we came in at €1.4 billion, which is €300 million ahead of our guidance, as improvements in our operational performance and favorable equity markets more than offset the adverse mortality experience. More than 70% of that was remitted to the group, resulting in free cash flow of €729 million, well above our guidance from the Capital Markets Day. As planned, we deployed about €200 million to reduce leverage. And since mid-2020, we have reduced our gross financial leverage by €700 million and now stand at €5.9 billion. So this puts us on track to meet our target of reducing our gross financial leverage to between €5 billion and €5.5 billion by 2023. At our Capital Markets Day, we guided for muted near-term dividend growth. But since then, we've made steady progress on our strategic priorities and financial targets. And this allows us now for more linear growth of the dividend. And as a result, we increased the full-year dividend by €0.05 compared with last year to €0.17 per share. In summary, I'm very pleased with the progress we have made over the last year. So let me show you where we stand with the execution of our operating plan on slide number four. Our ambitious plan, which now comprises more than 1,200 detailed initiatives, is designed to improve our operating performance. More than 840 initiatives have now been fully implemented. In the fourth quarter, we completed over 150 initiatives. This underscores that we are transforming Aegon and that we're doing this at pace, maintaining an intense execution rhythm. At this point, we have implemented more than 70% of the original 1,100 initiatives embedded in our operational improvement plan. Expense initiatives alone contributed €244 million to the operating results in 2021. Additionally, growth initiatives aimed at improving customer service, enhancing user experience, and launching new innovative products are well underway, contributing €115 million to the operating result of €221 million. So let's turn to slide five to discuss the progress we have made with respect to our strategic assets. Let me remind you that our priority here is to grow the customer base and expand our margins. And I want to take this opportunity to look back at the full year of 2021 and demonstrate the progress we have made since our Capital Markets Day. In US Individual Solutions, we have the ambition to regain a top five position in selected life products over the coming years. Last year, new life sales improved by 19% compared with the full year 2020, mainly driven by index universal life and whole life final expense products. We've extended our market share in the distribution channel World Financial Group and strengthened the distribution capacity of this channel by adding 6% more licensed agents over the course of 2021. Sales in World Financial Group are especially benefiting from a funeral planning benefit available for eligible indexed universal life policyholders. Whole Life final expense sales also increased compared with 2020, following enhancements made both the product and the application process. In the US retirement business, Transamerica aims to compete as a top five player in new middle market sales. This business continued to build momentum with the sixth consecutive quarter of written sales over US$1 billion. And in 2021 written sales were in aggregate one-third higher than in 2020. Assets under administration in the middle market segment grew by 12% during 2021 to more than US$50 billion, which was supported by favorable markets. The improved sales momentum helped reduce the net outflows for the full year. However, we recognize that we have more work to do here. So let's turn to our Dutch strategic assets on slide number 6. We are leaders in both mortgage origination and new style defined contribution pensions. We saw continued growth in these businesses throughout the year. Mortgage sales amounted to around €11 billion similar to 2020 as we continue to benefit from our strong origination capabilities. About two-thirds of the origination volume consisted of mortgages intended for third-party investors through our Dutch mortgage funds, on which we earn a fee. In our workplace business, we maintained a high level of net deposits for low-cost defined contribution products. Assets under management for this business surpassed the €6 billion mark at the end of the year underscoring Aegon's leading position in this market. The strategy for our online bank, Knab is to develop it into an additional gateway for individual retirement solutions. In 2021, Knab grew its customer base by nearly 17,000 customers. The growth rate was somewhat lower than last year, stemming from our decision to stop offering savings products to non-fee paying customers as these were loss-making. Moving on to the United Kingdom. Assets under administration increased to nearly £215 billion at the end of the year. Over the year, net deposits improved in the Workplace and Retail business, reflecting stronger investor sentiment as well as the benefits from ongoing investments in the business. Expense savings initiatives and the impact from favorable markets on assets led to an improvement in the efficiency of the platform. This more than offset the revenues lost from the gradual runoff of the traditional portfolio. Let me now turn to our Global Asset Manager in the growth markets on slide number 7. Our Asset Management business celebrated its 10th consecutive year of positive third-party net deposits. In 2021, both our global platforms and strategic partnerships contributed positively. Global platforms achieved €5 billion of net deposits in 2021, a significant improvement versus 2020. The operating margin of global platforms improved by almost two percentage points over the year to nearly 13%. This was driven by higher revenues as a result of favorable markets and net deposits. Our strategic partnerships continue to perform very well. Higher management fees from continued net deposits and favorable equity markets drove the operating result up to €199 million for the year, which represents now more than 10% of the group's overall results. In Aegon's growth markets, we continue to invest in profitable growth. New life sales increased by 4% over the year to €250 million with successful growth in the bancassurance channel in Spain and Brazil being partly offset by somewhat lower sales in China. This was caused by an industry-wide lower demand for critical illness products. New premium production for property and casualty and accident and health insurance increased by €107 million in 2021 as a result of sales of new products in Spain and Portugal. We continue to see benefits from the redesign of our digital sales channels through our Spanish bancassurance partners. In summary, we are progressing well on our strategic priorities. We have demonstrated solid growth in our strategic assets and growth markets in the last year and we will continue to drive efficiencies, while at the same time investing in products and services that better serve our customers in our various core businesses. And with this, I'd like to hand it over to Matt who will talk about the financial results and update you on our actions regarding financial assets. Matt, over to you.
Matt Rider, CFO
Thanks, Lard and good morning, everyone. Let me start with an overview of our financial performance over the last year on slide 9. On the back of the €244 million in expense savings achieved so far, our operating result increased by 11% to €1.9 billion. This was helped by increased fees from higher equity markets and positive contributions from business growth. These were only partially offset by adverse claims experience in the US mainly attributable to COVID-19. Cash capital at the holding increased to €1.3 billion on the back of more than €1 billion gross remittances from the business units to the holding this year. Remittances were partly supported by the distribution of excess capital from several units which brought us free cash flow for the year to €729 million. Since mid-2020 we have reduced our gross financial leverage by €700 million and now stand at €5.9 billion. This puts us on track to meet our target of reducing our gross financial leverage to between €5 billion and €5.5 billion by 2023. 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 year. Group Solvency II ratio increased by 15 percentage points during 2021 to 211%. Over the year, we have actively managed our risks and our capital position. In the US, we have nearly completed the interest rate reduction plan. We have also extended the dynamic hedging program to cover the entirety of our legacy variable annuity program. Furthermore, we have completed the lump-sum buyout program for certain variable annuities, reducing risk and doing so at both favorable terms to customers and shareholders. And we have seen continued success in our long-term care rate increase program. Last quarter, we indicated that we wanted to aim the volatility for mortality experience in the US. In the meantime, we have taken a number of actions including reinsuring a portfolio of universal life secondary guarantee policies to Wilton Re. In the Netherlands, we have reinsured additional longevity risk and have increased the predictability of remittances. Let me turn to slide 10 now to go into more detail on the expense savings. Addressable expenses in 2021 reduced by €217 million compared with 2019. €244 million of these savings were driven by expense initiatives that are part of our operational improvement plan. This level of expense savings is comparable to what we had achieved in the last quarter. The benefit of the additional expense savings initiatives implemented this quarter was offset by exceptional expenses related to performance-based employee expenses and investments in technology. Our progress makes us confident that we will be able to achieve our expense savings target of €400 million by 2023. In the coming quarters, we expect to see a more gradual delivery of expense savings. While we will continue to execute on our expense savings initiatives, we also need to absorb expense inflation and other upward pressure on costs. In addition, some of the larger initiatives are still in progress and will take some time to fully execute. Next to the expense savings, we benefited again from somewhat lower travel and marketing expenses due to the impact of the COVID-19 pandemic. These benefits have started to fall considerably compared with previous quarters and we expect them to go to zero over time. Through the growth initiatives that we are implementing, we aim to profitably grow our business by improving customer service, enhancing user experience, and launching new innovative products. These initiatives resulted in €44 million of expenses in 2021 and have contributed about €115 million to the operating result for the year. Let me now turn to Slide 11. In the fourth quarter of 2021 our operating result amounted to €470 million, a decrease of 2% compared with the same period last year. The apples-to-apples decrease is actually 1% at constant currencies and adjusted for the reclassification of the operating result of our Central and Eastern European businesses to other income. The decrease in the operating result was driven by the US which was negatively impacted by adverse claims experience, exceptional expenses, and lower fee revenues from expected outflows in variable annuities. This was partly offset by higher fee income from favorable market performance. US adverse mortality experience amounted to €83 million. Deaths that were attributable directly to COVID-19 were broadly in line with our expectations relative to US population deaths. The remaining mortality experience can mainly be attributed to higher claims frequency in Universal Life, which we believe to be in part indirectly related to COVID-19. The adverse mortality experience was partly offset by €30 million of favorable morbidity experience in the long-term care book, which included an €11 million release of the incurred but not reported reserve. In the Netherlands, the operating result increased by 16% to €195 million supported by the benefits of expense savings and business growth. All lines of business contributed to the higher results. In the UK, the operating result increased by 53% to €49 million driven by higher fee revenues as a consequence of favorable equity markets and a provision. The operating results from International increased by 23% to €48 million. On an apples-to-apples basis and again at constant currencies, the operating result almost doubled as a result of business growth and favorable claims experienced across the different businesses. Finally, the operating result from Asset Management decreased by 8% to €49 million. Higher management fees driven by net deposits and favorable market movements were more than offset by accruals of performance-related compensation as well as lower disposition and performance fees compared to the exceptional level of last year. Let's now turn from operating results to net results on the next slide. As we can see on Slide 12, our net result for the fourth quarter of 2021 amounted to €526 million, which was driven by the operating results. Non-operating items amounted to a gain of €226 million. Fair value items contributed €90 million largely driven by positive private equity and real estate revaluations in the Americas and in the Netherlands. Realized gains on investments mainly from mortgages and bond investments and net recoveries contributed €121 million and €15 million respectively. Other charges of €69 million were largely driven by a €133 million charge for model and assumption updates in the Netherlands. This resulted from a more granular modeling following the transfer of defined benefit pension administration to take or pay. One-time investments related to the operational improvement plan amounted to €81 million. These charges were partly offset by gains including those from a one-time benefit due to changes to the US employee pension plan. I now turn to Slide 13 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. US RBC ratio decreased by 20 percentage points during the quarter to 426%. The RBC ratio was adversely affected by the expected regulatory updates to required capital factors for investments and the actions we have taken to reduce mortality risk, including a mortality reinsurance transaction. Remittances to the group were offset by favorable market movements and the capital release from the lump-sum buyout program. In the Netherlands, the Solvency II ratio of the Dutch Life unit increased by 14 percentage points to 186%. The increase mainly reflects the longevity transaction as announced in December 2021, which significantly reduced required capital. Additionally, markets and model and assumption changes had a positive impact. The latter included a higher factor applied when calculating the loss-absorbing capacity of deferred taxes. These were offset by an item related to profit sharing on group pension contracts. During the year the profit sharing that had been accrued but not yet locked in was available to absorb adverse market movements and led to an SCR benefit. At the end of the year, when the profit sharing was locked in, this SCR benefit went to zero. Under normal circumstances, this leads to very minor impacts. But this year's favorable markets have amplified the impact. We are considering actions to address this potential volatility in the SCR caused by profit sharing. Operating capital generation had a positive impact, which more than offset the remittance to the group in this quarter. Let us now turn to the development of cash capital at the Holding on the next slide. Cash capital at the Holding increased to €1.3 billion at the end of the year, which is in the upper half of the operating range. In 2021, we received more than €1 billion of gross remittances from the units, about half of which came in the fourth quarter. The gross remittances for 2021 included more than €200 million of distributions of excess capital mainly from the UK, the Dutch Bank, and TLB. Total remittances from the business units translated into €729 million of free cash flow for the year. Approximately €500 million of this amount has been used to return capital to shareholders and to reduce leverage. Let me now turn to our financial assets on Slide 15. I'll start with the actions we have taken to maximize the value of our US Variable Annuity business. One of them is the lump-sum buyout program that was launched back in July. The program has reduced Transamerica's economic exposure at favorable terms, thereby reducing hedging costs for the portfolio of variable annuities with guaranteed minimum income benefit riders. At the end of the year, 16% of customers who received an offer had accepted it. The program concluded at the end of January 2022, with a total of 18% of customers accepting the offer. Furthermore, the dynamic hedging program was expanded in the first week of October and now covers the interest rate and equity risks embedded in the guarantees of our entire variable annuity portfolio. This builds on the dynamic hedge program that we have operated, with policies with guaranteed minimum withdrawal benefits. Both programs achieved a satisfactory hedge effectiveness of more than 90% in the fourth quarter. Having now completed the significant management actions relating to the US Variable Annuity portfolio, Aegon has allocated internal resources to investigate potential third-party solutions. We will update the market on our considerations regarding these potential solutions when we release our first quarter 2022 results. Let us now go to Slide 16. We have progressed well on the in-force management of our long-term care book. In the fourth quarter of 2021, Transamerica obtained regulatory approvals for additional rate increases of US$32 million bringing the value of approvals achieved in 2021 to US$342 million. This means that we have achieved 76% of the US$450 million rate increases that we are now targeting. Long-term care claims for the fourth quarter came in at an actual to expected ratio of 77%. The level of new claims is trending back to pre-pandemic levels. The claims experience reflects a US$13 million release of the incurred but not reported reserve that was previously set up for delayed long-term care claims. Excluding this release, the actual to expected claims experience for the fourth quarter of 2021 would have amounted to 87%, reflecting increased claims terminations due to the impact of the COVID-19 pandemic. Let me now turn to Slide 17. Our aim for the Dutch Life business is to turn it into a low-risk cash generator, paying predictable regular dividends. The Dutch Life business again remitted €25 million to the group in the fourth quarter in line with its quarterly remittance policy. The Solvency II capital ratio of the Dutch Life business increased by 14 percentage points to 186% and was again above its operating level. The increase in the Solvency II ratio in the fourth quarter was driven by the reinsurance of longevity exposure with a benefit of 15 percentage points on the Dutch Life solvency ratio. The reinsurance agreement provides protection against the longevity risk associated with €7 billion of pension liabilities. Together with previous agreements, we have now reinsured 40% of our longevity risk exposure in the Netherlands. These protect us against the potential adverse financial impact of longevity risk over the full life of the policies at an attractive cost of capital. Furthermore, we expect to release the regular remittances to the Dutch Life business from €25 million per quarter in 2021 to €50 million per quarter starting in the first quarter of 2022. This follows management actions taken over the past year to strengthen the capital position, improve the risk profile and increase capital generation. Let's now turn to our outlook for 2022 on Slide 18. Looking ahead to 2022, we will continue to make progress in delivering on our strategic objectives and our 2023 financial targets. First of all, we will continue to push ahead with our expense savings program to achieve our target of €400 million of expense savings by 2023 compared to the base year of 2019. The actions we have taken to improve our performance provide us with confidence that we will deliver around €1.2 billion for 2022 based on current market conditions. This reflects the impact of the actions that we have taken to both release capital and to improve our risk profile, therefore improving the quality of our capital generation. You should think of things like the extension of the dynamic hedging program to the legacy variable annuity book and the derisking of the employee pension plan in the US, as well as the additional reinsurance of longevity risk in the Netherlands. Furthermore, we have taken into account the impact of low interest rates on reinvestment yields and have assumed adverse claims experience of around €150 million, driven by COVID-19. While it is difficult to make predictions, we have assumed around 300,000 US population deaths directly and indirectly attributable to COVID, leveraging forecasts from various health organizations. The actions we have taken to improve our performance allow us to increase our 2022 free cash flow expectations to between €550 million and €600 million. This is an increase of €100 million compared with the outlook that we gave at the Capital Markets Day. We reiterate our commitment to reduce our gross financial leverage to between €5 billion and €5.5 billion by 2023, while we continue to benefit from the low coupons that our current securities provide. Supported by the progression we have made so far, we expect more linear growth of dividends instead of the muted near-term growth outlook provided at the 2020 Capital Markets Day. On our path to pay around €0.25 per common share over 2023. With that, I pass it back to you Lard for the closing.
Lard Friese, CEO
Thank you, Matt. Slide number 20 is a takeaway from today's presentation is that we are making steady progress in achieving our financial and strategic commitments. And I want to take this moment to also thank our employees, who throughout 2021 have worked tirelessly to progress towards our goals. And encouraged by the progress this year, we are fully energized to continue our transformation journey in 2022. I would now like to open the call for your questions. 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.
Operator, Operator
Thank you. We will now take our first question from Andrew Baker from Citi. Please go ahead. Your line is open.
Andrew Baker, Analyst
Great. Thanks for taking my questions. So, the first one is on your €1.2 billion capital generation outlook for 2022. So if I annualize the €400 million normalized quarterly cap gen that you referenced at 3Q and then deduct the €150 million for the COVID claims, that gets me to about €1.45 billion. So just hoping you could help me bridge back down to the €1.2 billion that you're referencing? And then the second one is on cash conversion. So, for 2022, if I look at your guidance, it looks like the cash conversion is around 60% or so, so free cash flow divided by operating capital generation after holding company costs. So, I'm just wondering when you expect this conversion rate to increase and what you need to do to sort of close this gap. Thank you.
Matt Rider, CFO
Thank you for your question. I'll explain how we arrived at the €1.2 billion guidance for the 2022 operating capital generation. First, we start with the actual operating capital generation before holding and funding expenses for 2021, which was approximately €1.425 billion. From there, we need to adjust for various management actions taken throughout 2021. This includes the longevity reinsurance deal we executed in the Netherlands, the variable annuity hedging, and the ALSO program in the US. We've also implemented measures to reduce mortality risk and performed some pension derisking in the United States. Altogether, these actions lead to a reduction in operating capital generation of about €150 million. Next, we must consider the effects of COVID-19 mortality and excess mortality throughout 2021 compared to our expectations for 2022. If we account for the adverse claims experience in the US for 2021, which amounts to around €125 million, we expect to recover about €150 million in 2022. When factoring in the impact of lower reinvestment yields due to persistently low interest rates, we reach the €1.2 billion level. There are multiple ways to bridge this, and if you would like more details, I recommend reaching out to Investor Relations for a comprehensive walkthrough. Regarding the free cash flow outlook for 2022, it’s best to start with the free cash flow generation from 2021, which was about €700 million. Assuming approximately €200 million in excess capital distributions, primarily from the UK business, TLB, and the bank, we can deduce around €500 million. Currently, we anticipate free cash flow guidance for 2022 to be between €550 million and €600 million. Notably, this assumes some credit impairments that exceed our long-term expectations. In the current credit environment, we reported net recoveries, but our long-term outlook is around $100 million in credit impairments. For 2022, we are anticipating about $150 million, which is significant for our upcoming projections. I hope this sufficiently addresses your question, even if it was a bit lengthy.
Andrew Baker, Analyst
Great. Thanks, Matt.
Operator, Operator
Thank you. We will now take our next question from David Barma from BNP Paribas. Please go ahead. Your line is open.
David Barma, Analyst
Good morning. My first question is about the actions taken on the U.S. Universal Life book. Can you help us understand the numbers you provided on the mortality reinsurance in relation to the risks associated with that segment? Additionally, do you think this could eventually allow for third-party options regarding part of the universal life block with secondary guarantees? That's my first question. Secondly, could you remind us of the requirements for excess cash distribution from the business units? At what point would you consider this life book to be in a good position? Thank you.
Matt Rider, CFO
Okay. First, on the actions taken to reduce mortality risk, we've implemented a few measures. The first is the reinsurance deal with Wilton Re, which involves a portfolio of high-face amount secondary guarantee universal life contracts. A portion of this portfolio is related to stranger-owned life insurance contracts, owned by institutional investors. We've indicated that this transaction will impact our RBC ratio by 12 percentage points, but it's important to note that about half of that is linked to another deal we're currently funding, which involves buying back some of those stranger-owned life insurance contracts from institutional investors. So, regarding the 12 percentage points impact on the RBC ratio, about half stems from this prefunding of the Stoli transaction. What this accomplishes is that, through the reinsurance deal with Wilton Re, we have reduced some Stoli exposure and mitigated high-face amount mortality risk. As we've observed with Aegon and Transamerica, there are mortality fluctuations due to these high-face amount contracts, and our aim is to reduce some of that volatility. To put this in perspective, the deal with Wilton Re pertains to a €42 billion face amount book of universal life with secondary guarantees. We've only reinsured about 9% so far, but it’s a positive start and reflects our commitment to sound management actions while balancing capital costs and minimizing earnings volatility to enhance capital generation and earnings quality, even if it means making trade-offs. As for your second question about whether this opens the door for third-party transactions, I would say it doesn’t really lead to that. I view it more as managing our current actions rather than indicating any major initiatives. Regarding the requirements for excess cash distribution from our business units, we’ve clearly outlined our capital management policy. We have a defined operating level for each business unit, but we haven’t specified a solvency ratio threshold for capital extraction. Instead, we evaluate based on current positioning, future outlook, and what’s necessary to support initiatives like our operating improvement plan. Capital extraction is something we approach carefully, ensuring we only withdraw capital as needed. Specifically, for the Dutch Life book, which is performing well at 186%, our focus is on maintaining them as reliable dividend payers. We aren’t looking to extract substantial excess capital from the Netherlands. However, we did increase the remittances from €25 million to €50 million, and you’ll notice that their capital generation and free cash flow reflect this design for predictability.
David Barma, Analyst
Thank you, Matt.
Operator, Operator
Thank you. We will now take our next question from Michael Huttner from Berenberg. Please go ahead. Your line is open.
Michael Huttner, Analyst
Thank you for the information. I have two questions. First, your cash is currently at the upper end of your target range, and you're increasing your free cash flow. However, it seems the dividends aren't significantly impacting that cash. What is the plan for this cash, especially if the Vienna Insurance disposal moves forward? Second, could you clarify the situation regarding US mortality? I'm a bit confused. I understand there's a deal funded by Solvency, but I'm not clear on how it affects earnings, as it seems to lower mortality costs. Yet you're indicating that mortality will be higher in 2022 than in 2021. I'm not seeing the advantages of the reinsurance deal. Could you please address that? Thank you.
Lard Friese, CEO
Yes, Michael, this is Lard. I'll start with the first question about cash capital, and then Matt can expand on US mortality. We are pleased with how our capital position has evolved. We currently have €1.3 billion in cash at the Holding Company. Our policy is to maintain cash reserves between €0.5 billion and €1.5 billion, so at €1.3 billion, we are at the higher end of our cash capital buffer. We provided clear guidance on this during our Capital Markets Day and want to ensure we have the financial flexibility to support the significant strategic, financial, operational, and cultural transformation at Aegon. Additionally, we have a target for reducing leverage. We aim to reach a leverage position of €5 billion to €5.5 billion, and we are currently at €5.9 billion, so there is still work to be done in this area. For any excess cash that we do not need for our plans and that supports our circumstances, particularly looking at macroeconomic conditions, we prioritize returning it to shareholders in the form of dividends or buybacks at an appropriate time. That is our policy and how we intend to operate. Now, regarding US mortality?
Matt Rider, CFO
Yeah. So one thing on the deal with Wilton Re and reinsurance in general one of the main roles of reinsurance is to reduce the amount of volatility that we have in our claims. So you could have a management best estimate for what your mortality is, but it could come in very lumpy and we've actually seen that in the past quarters. And we have – and part of it is due to very large face-amount contracts. And again, part of it stranger or owned by investors. So the goal of the reinsurance is to really smooth that out over time but again to stabilize our earnings and capital generation over time. So that's the first one. The second one is that the increase in the, let's say, the excess claims expectation is simply a consequence of COVID. I mean, we are expecting at this point in 2022 something like 300,000 US population deaths related to COVID-19. And it's quite a staggering number relative to where we are today. So it just say, it's a COVID factor.
Michael Huttner, Analyst
I understand – my question is if you reinsure and it costs you and you still have higher costs I don't get – I don't understand it. It sounds as if it's all negative it's not offset anywhere from the reinsurance. It's like you're paying money for nothing. I'm sensing here. So I'm trying to explain, why I'm still confused?
Matt Rider, CFO
No, I think so. But so let's take it to maybe piece by piece. So we have like COVID claims, right? So we have an increased expectation for mortality going into 2022. We do get reinsurance offsets from that. We are getting the benefit from those excess claims through reinsurance that we have on our total book of business. I think the difference is that on the new – on this newest reinsurance deal that we've done, the idea is that we want to again tame the volatility in the claims experience and that came the earnings and the capital generation. That's why we came to that.
Michael Huttner, Analyst
Understood. Thank you so much. Thanks for taking the question.
Operator, Operator
Thank you. We will now take the next question from Farooq Hanif from JPMorgan. Please go ahead. Your line is open.
Farooq Hanif, Analyst
Hi, everybody. And thanks for some really great improvements here in the results. Two questions. Firstly on inflation risk, so qualitatively, I know that a large proportion of your life book is fixed is nominal. But are there any areas where there is an inflation linkage how is that hedged? And then what's the impact on your better liabilities from higher wage inflation and salary inflation and cost inflation, so just the whole inflation topic and how well hedged do you feel about that? And then secondly, going to the US Retirement book, can you sort of give us maybe an outlook for when you think certainly the larger plan kind of segment that you'll start to see a tempering of those net outflows and kind of what you're seeing when you talk to your customers there? And also the ramping up of the middle market and the smaller schemes when – I mean, do you think 2022 is the transition year, or do you think we'll start to see some fruit? Thank you very much.
Matt Rider, CFO
I will address the first question regarding inflation risk. You asked about the extent of our contracts with inflation-linked elements. Most of this is concentrated in the Dutch book, where we have pension contracts that may include indexed pension benefits. We fully hedge the inflation expectations associated with these benefits. Additionally, we consider maintenance expenses in our estimates, which also account for inflation, and we have hedging measures in place for that as well. In fact, we expanded our hedging efforts in the early weeks of October last year. Overall, we have robust hedging for inflation-linked contracts in the Dutch book. In other parts of the world, we face inflation risk primarily from wage inflation, particularly in the US and UK. In the US, we manage this through our long-term care book, where we have caps on maximum daily and policy benefits to protect our company from significant inflation impacts, shifting the burden to customers. We also offer premium rate increase programs with options for customers to reduce benefits, which helps mitigate our risk. As mentioned earlier, inflation accompanied by rising interest rates presents a distinct scenario, and we are beginning to see improvements in capital generation. For instance, we are experiencing better reinvestment rates globally, especially in the US, when interest rates are higher.
Lard Friese, CEO
Thank you. I'll discuss the mid-markets and the US retirement sector. In the US, our primary focus is on the mid-market because we believe we can expand our capabilities there. Additionally, we are able to achieve higher margins and secure a better pricing position compared to competing in the large markets. While we do participate in the large-scale market, our main attention is on the mid-market. Currently, we're seeing strong momentum in written sales, with an increase of 33% for the full year, which is impressive and reflects our enhanced focus and capabilities. However, it's important to note that there is a time lag; while we can report these new sales, it takes time for the asset balances from these new plans to be reflected in our books. We've also observed an increase in withdrawals, which is largely due to the growth in equity markets that has raised the dollar amount of withdrawals, yet the withdrawal rate itself has remained stable. This means the rate of withdrawals has not worsened, but the amount transferred out has increased due to higher account balances from the equity markets. On the gross deposit side, approximately half of our inflows come from contributions that are primarily driven by wage growth and are not influenced by the equity market gains in recent years. Looking ahead, we have achieved more than one billion in written sales over several quarters. If we maintain this momentum, we anticipate that total net flows will eventually shift positively. There's no exact timeline for this change, as it depends on how quickly the amounts from departing plans are transferred off our P&L and balance sheet, as well as the timing of new written sales coming in. But over time, we expect this dynamic to turn in our favor as we continue to sell these plans.
Farooq Hanif, Analyst
Okay, great. That’s clear. Thank you very much.
Operator, Operator
Thank you. We will now take our next question from Steven Haywood, HSBC. Please go ahead. Your line is open.
Steven Haywood, Analyst
Thank you. Good morning. Did you mention on the call that you would update us about third-party solutions for your VA book at the first quarter results stage? Is that correct? And what, kind of, solutions are you investigating on that? And secondly, I think you mentioned this earlier about being Solvency II ratio of each unit is above your operating level but you're not willing to upstream excess capital out of these units currently to reach that operating level due to your near-term view of the markets and the capital required in this business. Is there any point in time that you think there might be more excess capital to upstream from the business units rather than the regular recurring upstream? Thank you.
Lard Friese, CEO
Hi Steven, this is Lard. Regarding the VA book, we will provide an update in Q1. Previously, we indicated we would revisit this in the first half of 2022, and now we can confirm that it will occur during the Q1 update. As mentioned last year, we have a framework for assessing our financial assets. There are unilateral actions we can undertake, such as expanding our hedge program, which we implemented at the end of last year. Additionally, there are bilateral actions that require regulatory approval, like the long-term care rate increase program, for which we are progressing well towards our targets, as Matt highlighted on the call. Another area we are exploring is third-party transactions. In our last discussion about the VA book, we emphasized establishing the dynamic hedge and focusing on the ALSO program, which we concluded successfully with an 18% take rate. Now, we will allocate resources to consider our approach regarding this large book and will provide updates during the Q1 results. Duncan Russell previously outlined many factors we consider, so for now, we cannot disclose more details. We will update you in Q1. Matt, would you like to address the upstream points?
Matt Rider, CFO
I want to clarify that this quarter demonstrates our readiness and capacity to move excess capital from business units when possible. Specifically, in the U.K., the Netherlands Bank, and TLB, we are showing our ability to do this. Your question pertains to when we might be able to do even more. Regarding the Netherlands, our current goal is to ensure they become a regular dividend payer, which is why we increased our remittance target by 100% for 2022. In the U.S., we must be aware of potential challenges. As we emerge from the COVID environment, we need to consider possible credit and equity market effects. We still have to support our operating improvement plan, but it's crucial to operate at a level where we can invest in organic commercial growth, as this is a significant strategic asset for us. We are willing to invest in that business as long as it leads to profitable new business growth.
Steven Haywood, Analyst
Thank you.
Operator, Operator
Thank you. We will now take our next question from Robin van den Broek from Mediobanca. Please go ahead. Your line is open.
Robin van den Broek, Analyst
Good morning everyone. Thank you for taking my questions. My first question is about OCG. I appreciate all the information shared about 2022. However, I would like to know if you could provide some thoughts on 2023, especially with stable equity markets in mind, and what the outlook might be for that year. Additionally, what remittance ratio might we expect for that year? I'm asking because your free cash flow update today suggests a cumulative delivery of €2 billion, assuming stable delivery in 2023. I believe that the delivery for 2023 could significantly exceed the €700 million you initially budgeted. Secondly, regarding leverage, you have indicated that the target range of €5 billion to €5.5 billion remains intact. I remember that this target was initially set due to the fixed charge cover not being at your desired level. It seems that situation may have changed. Furthermore, your CE asset disposal was intended to help you reach that target, but it appears you may require less cash inflow to achieve that goal. Could there be a possibility that some of those disposal proceeds would be allocated towards a buyback? Thank you.
Lard Friese, CEO
Yes, thank you for your questions. Let me address the last one while Matt covers the first. We have a clear target for leverage reduction set at €5 billion to €5.5 billion. We are committed to achieving this, and while we are currently at €5.9 billion, we still aim to reach that target and have work to do. Additionally, we now have €1.3 billion in cash capital in the Holding Company, which does not account for any proceeds from the transaction you mentioned. I want to reiterate that we are dedicated to our leverage reduction program. Simultaneously, we want to maintain a cash capital reserve of €500 million to €1.5 billion, of which we are currently at €1.3 billion. We have proposed a €0.09 EPS final dividend for the year to our stockholders, so you can calculate that. Any excess cash we have, which is not needed for our plans and allows us to consider macroeconomic factors, will be prioritized for returning to stockholders through dividends or buybacks when deemed appropriate. That's our approach. Matt?
Matt Rider, CFO
Regarding the outlook for operating capital generation in 2023, we provided guidance for 2022 to help set expectations. At our Capital Markets Day, we projected a non-IFRS outlook of €1.3 billion for operating capital generation before holding and funding expenses. This figure is important as it assumes we are beyond the impact of COVID. Since then, market performance has exceeded our expectations, contributing an expected €300 million tailwind. In 2021, we initially aimed for €1.1 billion in operating capital generation but ended up exceeding €1.4 billion, largely due to market conditions. If markets remain stable, we expect to maintain this benefit in 2023. We must also consider management actions that have resulted in about €150 million in expenses this year. After accounting for this, we anticipate reaching roughly €1.5 billion. Additionally, interest rates in Europe have risen, meaning we will not experience the previously expected reduction in UFR, leading to higher operating capital generation in the Netherlands. Consequently, our 2022 outlook suggests that the life company will remit more than its anticipated operating capital generation. In summary, we foresee reaching around €1.5 billion when all factors are considered.
Robin van den Broek, Analyst
And on remittances from a – on?
Matt Rider, CFO
Remittances – so let's say for the Netherlands, we would expect at this point, we would continue with the €50 million per quarter. For the US, we will see that you can rely again, given current markets on the remittance levels that we've gotten out so far maybe ticking up a little bit. We want to be – again, this is one of the reasons why we didn't give so much guidance for 2023. We really want to see that operational improvement program kick in in the other country units as well.
Robin van den Broek, Analyst
But in this bridge, you're not really putting any OCG value to the operational improvement that's still to come. Why is that?
Matt Rider, CFO
There actually is a benefit in it and it's about let's call it €100 million that's going to be embedded in there. But the important thing is that the €100 million would have been embedded in the 2023 guidance that we gave at the Capital Markets Day anyway. That's why the – that's why we are getting a benefit from the point bridge from 2023 and then you don't pick it up. I'm sure IR can help you with the various different ways of bridging to get to it. But at the end of the day you will come to a number that is in that €1.5 billion range OCG in the business units for 2023.
Robin van den Broek, Analyst
Thank you.
Operator, Operator
Thank you. We will now take our next question from Nasib Ahmed from UBS. Please go ahead. Your line is open.
Nasib Ahmed, Analyst
Thanks. Thanks for taking my question. So the first one, you mentioned the reinsurance transaction with Wilton Re. I think they reinsure long-term care books in the past. So given you've got a relationship there I was wondering if there's anything you're planning on doing in the long-term care book, or do you think that you're the best owner of the book at the moment? And then secondly, sorry to come back on the variability book. Just a quick question here on the side of the book and sort of the appetite for third-party transactions in the market. Do you think you can do a transaction given the size of Aegon's book of €80 billion, or is it going to be in a couple of transactions? And what's your thinking there is going to be – I think you've meant reinsurance in the past that's probably going to be the likely solution. And any more actions that you need to take or can take to improve the pricing on the eventuality achieved?
Lard Friese, CEO
Yes, Nasib, this is Lard. Let me take the VA piece. Not much to add to what I said earlier. We have – we will give you – we will give the market an update on our considerations at the Q1. So I think speculating about all the potential solutions that would be available or not available to us I think is at this point not, I think, very helpful. So we're working hard on it. We've done a lot of work on the VA book and we aim to give you an update in Q1 – the Q1 results. So maybe Matt over to you.
Matt Rider, CFO
Yes, on the – so maybe first on the VA book, everything Lard just said is perfect. We can't take small management actions on that book. So for example, we have done rider rate increases where it's possible. So this is really as a financial asset, we think of it as a hunt for capital leave no stone unturned. But I would say on that kind of thing it's relatively small in the grand scheme of things, but I just want to point out that we're actively working these things. On the long-term care reinsurance, we are going to be the best owner of this. There is no appetite in the market for reinsuring a big block of long-term care business. I think that we have shown that we have been effective in getting premium rate increases through the state insurance departments and that's – we are going to be the owner of this book for quite some years. But again, it looks like we've been pretty effective at managing and so far.
Nasib Ahmed, Analyst
Thank you.
Operator, Operator
I will now turn the call back to Jan Willem for closing remarks.
Jan Willem, Head of Investor Relations
Yes. Thank you. Thank you, operator, and thanks everyone for the call today for listening to us. As always, if you have additional questions please reach out to Investor Relations. We are happy to help. Have a good day and thank you for your participation in today's call.