Earnings Call
Aegon Ltd. (AEG)
Earnings Call Transcript - AEG Q3 2022
Operator, Operator
Thank you for joining this conference call on Aegon's Third Quarter 2022 Results. Before we start we would like to ask you 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; CFO, Matt Rider; and Chief Transformation Officer, Duncan Russell who will take you through our 3Q results and the progress we are making in the transformation of Aegon. After that we will continue with our Q&A session. And on that note, I would like to give the floor to Lard Friese.
Lard Friese, CEO
Yes. Thanks Jan Willem and good morning everyone. We appreciate that you're joining us on today's call. It's been a busy few months for us here at Aegon and I want to start by running you through our achievements on slide number two. In the past few months we have taken a number of important steps in the transformation of Aegon. We have made substantial progress on our operational improvement plan and taken additional actions to maximize the value of both our US variable annuity book and TLB, our high net worth insurance business. And of course, we recently announced the combination of Aegon the Netherlands with ASR. We also made solid progress on our ambition to grow our strategic assets, especially in our life and retirement businesses despite continued financial market volatility and political unrest. Our operating results in the third quarter declined by 11% on a constant currency basis, reflecting adverse market conditions that more than offset an improvement in claims experience in the United States expense savings and the benefit from growth initiatives. Based on extensive analyses and the learnings from engagements with third-parties, we have concluded that the best option with respect to our US variable annuity portfolio is to continue to own and actively manage it at least in the near term. Furthermore, we recently completed an internal reinsurance transaction between TLB and Transamerica that freed up $600 million of excess capital. This will in part be used to create a buffer to mitigate the impact of adverse equity markets which materially reduces the capital sensitivity of our US variable annuity book. But we're not done yet. We continue to see opportunities for growth and greater efficiency and we will remain focused on the execution of our strategic agenda. So, let's turn to slide three. In October, we took a pivotal step in our transformation with the agreement to combine our Dutch activities with those of ASR to create a leading insurance company in The Netherlands. The transaction enables us to accelerate the return of capital to stockholders. It also propels our strategy of releasing capital from mature businesses and building advantaged businesses in our chosen markets where Aegon is well-positioned for growth. Additionally, the long-term asset management agreement that we have entered into with ASR strengthens our position as a provider of fiduciary services, retirement multi-asset solutions, fixed income, and responsible investing. We are excited about the transaction and the opportunities it brings. After the closing, we will hold a strategic stake of almost 30% in ASR. And through this stake, we will benefit from the synergies that this in-market consolidation brings. The majority of the cash proceeds from the transaction will be used to return capital to shareholders. We expect the transaction, the synergies, and the capital deployment to result in accretion of the free cash flow per share over time. We have started the preparations to get approvals from the relevant stakeholders and we initiated a program to disentangle the Dutch business from the group to ensure a smooth transition to ASR. Slide number 4 highlights the good progress we continue to make with the execution of our operational improvement plan. We have now implemented most of the more than 1,200 initiatives that are part of this plan. Just in the last three months, we completed another 100 initiatives and our efforts are bearing fruit. Expense initiatives resulted in a reduction of annual addressable expenses of €300 million in the trailing four quarters compared with the base year 2019. This is an increase of €50 million compared with last quarter. We have been able to absorb inflationary headwinds and further reduce our expense base towards the goal of €400 million expense savings by 2023. We are also increasingly seeing the benefits from our 260 growth initiatives that we have executed so far. Over the trailing four quarters, growth initiatives contributed €264 million to our operating results. In light of the announced transaction with ASR, we will update our expense savings target and other targets in due course. And in the meantime, we will remain disciplined and focused on improving the operational performance across all our businesses. Slide number 5 zooms in on the progress of our US strategic assets. In individual solutions, we have the ambition to regain a top five position in selected life products over the coming years. And as you can see, commercial momentum remains strong in this segment. New life sales increased by 24% compared with the third quarter of last year. This was supported by the World Financial Group distribution channel where the number of licensed life agents grew another 10% compared with last year and now stands at nearly 60,000 agents. In the retirement business, Transamerica aims to compete as a top five player in new middle market sales. Written sales were US$805 million this quarter, which is lower than the same period last year. Nevertheless, I'm satisfied with the results, considering the difficult circumstances with planned sponsors being hesitant to move retirement plans given the current volatile markets. Strong written sales in prior periods supported an increase in net deposits for the middle market to US$532 million. We will build upon Transamerica's emerging commercial momentum and intend to invest capital to profitably grow our market share in selected product lines. We will share more details on our plans to profitably grow Transamerica as well as the UK our growth markets and our global asset manager at a Capital Markets Day in the second quarter of 2023. Turning to slide 6, where we highlight the performance of our Dutch and UK strategic assets. I will start with the Netherlands, where we are a leading player in both mortgage origination and defined contribution pensions and continue to attract new customers. Mortgage sales decreased to €2 billion as the Dutch housing market is cooling down. Nevertheless, mortgages under administration continue to grow, partially due to lower client repayment activity that now amount to more than €62 billion. We also continue to consistently grow our workplace business, mainly driven by sustained strong demand for PPIs. Net deposits for defined contribution pension products increased by 35% to €245 million in the third quarter of 2022. Moving on to the United Kingdom. In the third quarter of 2022, the platform business across the retail and workplace channels generated net deposits of £83 million. Our workplace business delivered another quarter of positive net deposits. Outflows in retail reflects the impact of market volatility on customer confidence and their propensity to invest in line with what we have seen across our industry. Revenues for the overall UK business declined, as a result of the anticipated granular runoff of the traditional product portfolio. Despite the unfavorable impact of adverse markets under assets under administration, the efficiency of the platform deteriorated only slightly as a result of the steps we made to reduce expenses. Slide number 7 shows that our Asset Management business saw third-party net outflows in the global platforms, which reflect the challenging market conditions and the fact that customers freed up liquidity in a rising interest rate environment. Third-party net deposits and strategic partnerships of €1.5 billion more than offset the €1 billion outflows in global platforms, leading in fact to positive net deposits for Asset Management overall. The operating margin of global platforms improved by around two percentage points to approximately 15% driven by lower expenses. This includes a reduction in accruals for variable compensation. The operating result from strategic partnerships decreased by 38%, as performance fees for our Chinese Asset Management joint venture reduced from last year's elevated level due to adverse market conditions. In our growth markets, Aegon is investing in profitable growth. New life sales from these markets increased by 16% to €54 million and non-life sales grew by 17% to €25 million. In summary, we remain focused on executing our strategic agenda and continue to maintain a high pace in transforming Aegon despite the challenging backdrop. Duncan will now provide you with more detailed information on the actions we have taken regarding TLB and the US variable annuities book. Duncan, over to you.
Duncan Russell, Chief Transformation Officer
Thank you, Lard. Let's move to slide 9. At our Capital Markets Day, we laid out our strategy to focus on three core markets, three growth markets, and one global asset manager. We made clear that businesses outside the corporate limits will be managed with tight capital and a bias to exit. We made good progress on our portfolio rationalization, whether it's through the divestment of Central and Eastern Europe, or our various actions to release capital by winding down or selling subscale ventures and businesses. TLB, our high net worth business, was the largest remaining operation outside the core perimeter. In the past two years, it has been managed with a focus on strict cost control and capital efficiency to increase its capital generation. Over the past years, we have considered different strategic options for TLB, including a divestment. Following this review, we have decided to extend our internal reinsurance of TLB's closed block to Transamerica. As of the fourth quarter of 2022, Transamerica will also reinsure the remaining 75% of TLB's closed block of universal life policies that have previously not been reinsured, meaning that 100% will now be internally reinsured. Transamerica will hold additional reserves to cover the underlying risks, but it will also be allowed to recognize excess capital of TLB in its capital position. This frees up around $600 million of excess capital on a US level, which will increase Transamerica's RBC ratio by approximately 30 percentage points in the fourth quarter of 2022. As a consequence, we feel that we have landed on the optimal solution for TLB compared to the alternatives and therefore, we'll classify the business going forward as a financial asset with a continued focus on improving cash flows and disciplined capital management. Next on slide 10, let me update you on our variable annuity business. In recent months, we have engaged with third parties to explore the possibility for a reinsurance deal. These interactions gave us confidence in our actuarial assumption set for variable annuities. And we saw that these third parties aim to manage the liabilities economically just as we do. Put simply, we witnessed a management approach and philosophy around VA that was consistent with where we have taken the block in recent years. Following these interactions, we have decided not to engage further on a variable annuity transaction at this point in time. There are three main reasons for this. First, a transaction will lead to significant counterparty exposure given the size of the variable annuity business we have. And we have concluded that doing a smaller deal and thus reducing potential counterparty exposure wouldn't represent a good use of time and effort given the intensity of these processes. Second, we would need to deal with stranded costs as the variable annuity block supports a substantial amount of overhead expense. These costs will need to be addressed as a block shrinks naturally over time in an orderly manner. Over time, as the variable annuity block runs off and we successfully grow our strategic assets, stranded costs and counterparty risk will become less of a consideration for us. Thirdly, with respect to valuation, the block under our ownership benefits from two main items: Number one, Transamerica benefits from a lower cost of liquidity management, given its overall large and diversified balance sheet; number two, we believe there is value in the emergency fees on the base contracts, as these are asset management look in nature. Other parties tend to hedge the base fees due to the volatility in the capital position it creates in particular on a smaller balance sheet. For this reason, we concluded also that the value benefit of the transaction was unlikely to be compelling. Now our work on the block does not stop. In October, we have taken another management action on the variable annuity portfolio following on from the actions we've taken so far. We have decided to set voluntary reserves, which reduces the amount of base fees reflected in the capital position. Second, the reserve will reduce the RBC ratio by approximately 15 percentage points in the fourth quarter of 2022. But by setting up the reserve, the recognition of base fees in our capital vision will be more closely aligned with when they are earned. As a result, the sensitivity of the RBC ratio to a 25% decline in equity markets will reduce by about one-third. When taken in conjunction with previous actions we have put in place, for example the dynamic hedging and the policy buyouts, this additional action brings further stability and quality to capital generation as the variable annuity block runs off. I would now like to hand over to Matt to address the financial performance slide in the third quarter.
Matt Rider, CFO
Aegon's operating result decreased by 3%, but by 11% on a constant currency basis to €429 million. Lower fees due to adverse market movements and expected outflows in variable annuities more than offset the benefits from expense savings, growth initiatives and an improvement in claims experience. As Lard mentioned, addressable expense savings for the trailing four quarters increased by €50 million over the last quarter and now total €300 million compared with the full year 2019 expense base. Operating capital duration before holding, funding and operating expenses amounted to €399 million mainly reflecting strong performance from the US, driven by income from alternative investments and seasonality and reserve movements in the US. Cash capital at the holding decreased to €1.4 billion, mainly as a result of €373 million of capital being returned to shareholders, which more than offset this quarter's free cash flow of €67 million. Our gross financial leverage amounted to €5.8 billion, which is slightly higher than last quarter due to the strengthening of the US dollar. As mentioned in the press release, we issued on October 27, we intend to use up to €700 million of the cash proceeds from the transaction with ASR to reduce our leverage further. 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 decreased by two percentage points over the third quarter to 212% mainly from market movements. Furthermore, eligible owned funds reduced due to tiering restrictions on the amount of deferred tax assets that we are allowed to recognize as capital. Turning to Slide 13. We saw the third quarter operating result come in at €429 million. Adverse markets have impacted our results in particular in Asset Management and in the United States. The operating result in the US decreased by 4% or 19% on a constant currency basis to €156 million. The primary driver of this was a lower result from variable annuities where fee income was negatively impacted by adverse markets and expected outflows. This was partially offset by an improvement in net claims experience in life and health. Mortality claims experience was €30 million unfavorable in the quarter of which €12 million related to deaths directly attributable to COVID-19 with the remainder due to a higher than average claim size. Morbidity experience for the quarter was in line with expectations. In the Netherlands, the operating result from our bank Knab and from Workplace Solutions increased supported by business growth. This was more than offset by a decrease in operating results from life and mortgages from lower investment income and lower mortgage prepayment compensations. In the UK, fee revenues declined as a result of unfavorable market developments and the runoff of the traditional product portfolio. This was more than offset by lower addressable expenses driven by the operational improvement plan. Once again, Aegon international performed well delivering growth across all businesses and showing improved claims experience compared to the same period last year. Finally, the operating result from Asset Management decreased by 25%, mainly driven by lower performance fees in the Chinese asset management joint venture, which were negatively impacted by poor equity markets. While market movements negatively impacted revenues and global platforms, the operating result actually showed improvement over the year-ago quarter due to lower addressable expenses. Let us go now to slide 14, where we show that the net loss for the quarter amounted to €206 million. Non-operating items totaled a loss of €622 million, mainly driven by an accounting mismatch related to the interest rate hedges for our legacy US variable annuities. This program hedges the economic liability. However, under IFRS, we carry the hedge assets at market value, while the liabilities for guaranteed minimum debt benefits and guaranteed minimum income benefits are calculated using locked-in discount rates. The increase in interest rates during the quarter therefore drove a fair value loss as a consequence of this accounting mismatch. Realized losses amounted to €127 million from the sale of sovereign and corporate bonds in a rising interest rate environment, consistent with Aegon's strict liquidity framework. Other charges amounted to €107 million, reflecting €79 million of one-time investments related to the operational improvement plan. On slide 15, I want to go through the capital positions of our main units, all of which ended the quarter above their respective operating levels. The US RBC ratio decreased 12 percentage points over the quarter to 404%. The RBC ratio was negatively impacted by unfavorable market movements. Benefit from the operating capital generation was offset by US$200 million of dividends to the US intermediate holding company. These remittances from the operating companies were made in order to pre-fund the majority of the remittance to the holding, anticipated to occur in the fourth quarter of this year. Please note that the net 15 percentage point positive impact from the reinsurance transaction with the TLB and the setup of the voluntary reserve and variable annuities that Duncan mentioned will be reflected in the RBC ratio in the fourth quarter. The Solvency II ratio of the Dutch Life unit increased to 207%, particularly from a tightening of mortgage spreads and a flattening of the interest rate curve. The solvency ratio of Scottish Equitable, our main legal entity in the UK increased by one percentage point to 179%. On slide 16, you can see that the cash capital at the holding came down to €1.4 billion during the quarter, which is close to the top end of the operating range. This quarter, we returned €373 million of capital to shareholders through dividends and the second tranche of the share buyback program announced in March. We still have one tranche of €100 million from the share buyback program to go, which is expected to be completed during the fourth quarter of 2022. Slide 17 summarizes the great strides we have made in recent months in maximizing the value of our financial assets. In the third quarter, we continued our track record of successfully hedging the targeted risks embedded in our variable annuity guarantees. We achieved 97% hedge effectiveness, despite significant volatility in financial markets. This is another example of how we are stabilizing the capital generation from this block of business. In long-term care, I am pleased that we obtained regulatory approvals for additional rate increases worth US$59 million. The total value of approvals achieved since the start of the program now stands at $450 million. This means that we have achieved our target for this program, which we upgraded a year ago from the $300 million target that we had set ourselves at the Capital Markets Day back in 2020. We will continue to work with state regulators to get pending and future actuarially justified rate increases approved. The Dutch Life business again paid its remittance of €50 million, which was well-covered by the €63 million operating capital generation for the quarter. And as just explained by Duncan, TLB will also be managed as a financial asset going forward. The reinsurance transaction that we announced today will free up capital and strengthen Transamerica's capital position. And with that final note, I now pass it back to you Lard for the wrap-up.
Lard Friese, CEO
Yeah. Thanks, Matt. Let's go to slide 19. I'd like to reiterate that we are maintaining a high base in Aegon's transformation. We are making good progress on the operational improvement plan, we are maximizing the value of our financial assets and we are investing in profitable growth. I'm, therefore, confident about delivering on our strategic and financial commitments. As a final note, I want to share my appreciation for the hard work and dedication of all colleagues to support our customers' needs in challenging times. Specifically our employees who are affected by the transaction with ASR and we continue to work tirelessly to improve our performance despite the uncertainty that the transaction brings for them personally. It is thanks to the efforts of our employees that we are able to continue to improve our operational performance and accelerate our strategy. I would now like to open the call for your questions. Please be so kind to limit yourself to two questions per person.
Operator, Operator
Thank you. The first question is from Andrew Baker from Citi.
Andrew Baker, Analyst
Great. Thank you for taking my questions. So the first is on capital generation. Just wondering if you could provide some of the usual moving parts on the capital generation and what you've seen in the clean quarter run rate for both Q4 and then also 2023? And then the second one is on the variable annuity book. So, obviously, you're retaining the book in the near-term but it feels like you're not rolling out Q3 transactions just based on the growth of the underlying US business and when you can reduce that the impact of counterparty risk and the strategic costs. Just wondering based on your projections today, how long do you think it will be before those two constraints are small enough that you might be able to consider a transaction for that book? Thank you.
Lard Friese, CEO
Yeah. Thank you very much Andrew. I'm going to ask Matt to do the capital generation, and then thereafter Duncan on the VA. So first Matt over to you.
Matt Rider, CFO
Yeah. Thanks Andrew. So for the third quarter the operating capital generation from the business units that we reported was €399 million. We did have some what we would call unfavorable mortality and morbidity experience there in the amount of about €41 million. But we did get a benefit in two main items; one was in alternative investment income was higher than what we had expected in the amount of about €30 million. And then we had some favorable benefit from some seasonality in universal life reserving. And this was for an amount of about €35 million. So we also had about €25 million of good guys from international where we benefited from some lower required capital from just change in asset mix together with some favorable claims experience. So if you net that all out, we end up with about a clean number for the quarter of about €350 million. So if you think about going forward for 2022 we have year-to-date reported €1,175 million of operating capital generation in the business units adding sort of a clean run rate of the €350 million for the fourth quarter and that gets you to something around €1.5 billion. So that's an upgrade of the OCG guidance that we had given last quarter which was around €1.4 billion. Now we say it's about €1.5 billion. So it looks like we're on a good track to be able to achieve that. At this point in time we're not giving any guidance on 2023 yet. We will do that in due course likely in the fourth quarter as we work through those ones.
Lard Friese, CEO
Thank you very much, Matt. So Duncan, the VA question?
Duncan Russell, Chief Transformation Officer
Thank you, Andrew. You're correct in highlighting that our two main considerations were the counterparty exposure since we don't have a separate legal entity, which means any deal would involve reinsurance. The second consideration was addressing stranded costs, which could be managed, though some of these costs will remain fixed. Currently, we are focused on revitalizing the growth engines within Transamerica. Regarding the timeline, we will continue our assessment of this block of business. We have significantly reduced risks and stabilized capital generation from it, and we will keep looking for additional management actions as we have previously. We do not plan to make any near-term transactions, but as the policy count decreases by 8% to 10% per year, the issues I mentioned should become less significant for us. Consequently, this could provide an opportunity for us to reassess in the coming years.
Andrew Baker, Analyst
Great. Thanks, guys.
Operator, Operator
Thank you for your question. We are now taking the next question. The question from Robin van den Broek from Mediobanca. Please go ahead.
Robin van den Broek, Analyst
Good morning, everyone. I apologize if I ask something you've already covered, but I experienced some disconnections. My first question pertains to the management actions in the US. It's clear that you're increasing your absolute level of RBC in local units, but beyond that, it also seems to be lowering your volatility regarding the equity markets in the US overall. I would assume that this should be quite positive for remittances for the group. Could you provide some insight into that and also discuss the potential for regular buybacks within that context? After your remarks last week following the Aegon deal, it seems we can anticipate significant buybacks post-H1 of next year. I'm curious how these management actions might influence your decision-making by the Q4 stage. Secondly, regarding the group ratio, you mentioned some diversification benefits impacted by Tier 3 eligibility challenges. With the Dutch units being removed, I suspect the diversification benefits might decrease further. Has this already been incorporated into last week's guidance regarding your group Solvency II ratio? Following that, should we even be concerned about your group Solvency II ratio once the Dutch unit has transferred? I would think the answer is no, but I would appreciate your reasoning on this. Additionally, about the OCG bridge, I recall that last quarter you provided guidance. Is the lack of guidance now due to the ongoing deal uncertainties, as you seek more clarity on the variables, or are there other reasons? Thank you.
Lard Friese, CEO
We did it for this year, but not for next year. Matt, over to you.
Matt Rider, CFO
Yes. Regarding the management actions, that's correct. The Transamerica Life reviewed reinsurance deal will contribute approximately 30 percentage points to the RBC ratio, and we are using 15 percentage points of that to fund voluntary reserves. So, in terms of your question about whether this is remittance positive, it is certainly cash flow positive for the US business, which is our intention: to enhance the solvency level of the US while also providing support for future growth. If we achieve that growth, it will indicate that we have executed our responsibilities effectively and secured new business profitably, which is positive. If we do not see that growth, we will revert to our standard capital management policy where any excess capital in the country units will come back to the group. For now, we are keeping it in the US. Regarding the group ratio, there was a slight movement in the group solvency ratio, impacted by a loss of some diversification benefits and market changes. Your main inquiry seemed to relate to the earlier announcement about the ASR transaction, which factored in those changes to the group solvency ratio. As you pointed out towards the end of your question, the group solvency ratio is becoming less critical for us. We focus on the capitalization of the primary country units together with cash capital at the holding level to manage capital within the group. I also mentioned the OCG bridge; we've updated our guidance for 2022 to €1.5 billion. However, we have many variables at play right now and would like to clarify those before providing guidance for 2023. It doesn’t go any further than that.
Lard Friese, CEO
Yes. To finalize your questions, regarding regular buybacks and the company's buyback potential, we were quite clear about this last week. In the context of our combination with ASR, the cash portion of that consideration will lead us to plan for a €1.5 billion return of capital. We need to ensure that we don't create an indefinite timeframe for this. We'll focus on reducing the company's share count with the allocated €1.5 billion. For the remainder, we have a stated policy to maintain a cash buffer between €0.5 billion and €1.5 billion, which we also want to keep at a higher level for two main objectives in the U.S. One is to create profitable new growth and fund that, and the other is to use funds for additional management actions or in-force management actions that may arise in the U.S. Beyond that, any excess beyond what's needed for our overall business plan will have a clear priority: it will return to shareholders over time unless there is a value-creating opportunity that requires our attention. The main priority is clear from this. With that, I believe we've addressed your list, so I'll turn it back to the operator.
Robin van den Broek, Analyst
Thanks.
Operator, Operator
Thank you for your question. We are now taking our next question. The question from Cor Kluis from AAOB. Please go ahead.
Cor Kluis, Analyst
Good morning. I have two questions to start. First, regarding the VA business, its significance as a portion of non-life capital in the system contributes to its stability. You mentioned that this is likely beneficial for long-term free cash flow. How will this transaction impact OCG or capital generation? Additionally, could there be more transactions like this in the future, given that it's a voluntary action? For instance, might you consider adding another €300 million in a few quarters to enhance stability? My second question relates to the ASR transaction where you exchanged Aegon Netherlands for a stake in ASR. How does this affect the robustness of the debt structure since it involves the holding and not the unit? Has the unit structure been altered because of this transaction? Will there be any consequences for the holding debt structure? We understand you plan to reduce €700 million, but will this also involve transferring debt to other countries, and how might that impact interest costs on other transactions? Lastly, Matt, you mentioned wanting to retain some additional capital in the U.S. for further management actions. Could you clarify what type of actions we should anticipate? That’s all from me.
Lard Friese, CEO
Thank you very much, Cor. The first three questions will be addressed by Matt, and the last one will be handled by Duncan regarding the transaction in the U.S. Matt, it's your turn for the first three.
Matt Rider, CFO
Yes. Cor thanks. So for the VA business indeed by setting up this voluntary reserve we are reducing the RBC ratio by 15 percentage points, obviously more than made up by the TLB reinsurance transaction. It does have an impact on what we would expect for operating capital generation going forward. So you can think about it as €50 million a year round numbers over the next couple of years. Importantly, that's not the reason why we did the transaction. We really want to set up that voluntary reserve mainly to stabilize the RBC ratio not to inflate our OCG. That's not – yes. So yes, Lard reminds me that the €50 million OCG is indeed positive. You also sort of tacked on to that question is there an opportunity to do more of this sort of implying are we going to move this around quarter-by-quarter. No. Actually, we have a mechanism to be able to accomplish this, which we don't want to touch for a number of years. This is not OCG management in any way. And we felt like that the level of voluntary reserves that we struck combined with the benefit that we're getting from TLB, really optimizes the day one effect, operating capital generation and really risk management mainly on the RBC volatility. Your next question was with regards to hey, does the ASR transaction change something with the structure of our debt stack? The short answer is probably not in the short term, something that we want to work out over time. Importantly, we did say that there was about a €700 million reduction in leverage that we would expect or I should say up to €700 million but that will be for I think another day to revisit that one. On the management actions Duncan, do you want to cover those?
Duncan Russell, Chief Transformation Officer
Yes. Not an awful lot to add Cor apart from – we'll have to wait and see. I mean one of the key philosophies we've had since the Capital Markets Day, two years ago is indeed to look for ways to improve net present value, particularly the financial assets. And as you're aware over the last couple of years we've taken quite a lot of action whether that's in the Netherlands or in the US. Just looking at the VA in isolation we extended the dynamic hedging, we implemented a lump-sum buyout program, we increased the fees on separate items, we implemented a long-term volatility assumption to reduce factory capital volatility, we increased the basket of indices within the hedge program to include NASDAQ to reduce further volatility and we announced reserve. So just on that block of business we've done an awful lot. That's before we take into account actually the long-term care and the life blocks. So we have a rhythm. We have a team in the US and also in the Netherlands and I'm confident that with that rhythm the team will find further opportunities in the future.
Cor Kluis, Analyst
Okay. Very clear. Thanks very much.
Operator, Operator
Thank you for your question. We are now taking our next question. The question is from David Barma from Exane. Please go ahead.
David Barma, Analyst
Good morning. Thank you for taking my question. The first I have is on the US life segment, where you mentioned some higher persistency in parts of the portfolio. So we discussed that in the second quarter I think and my understanding was that loss assumptions were very low. So the comments in today's release have any implications for reserving in the life book? That's my first question. And the second one is on the Netherlands, where you flag again today some realized losses linked to assets sales to maintain the liquidity position. What's the absolute amount of assets year-to-date that have been needed to maintain the liquidity position? And also could you help me understand the implications that this could have on ALM and the rerisking potential in the near-term? Thank you.
Lard Friese, CEO
Thank you, David. Matt you take both?
Matt Rider, CFO
Yes. The first part is straightforward. We have been experiencing low persistency, which we attribute partly to COVID. This situation does not affect our reserving today. It is well known that we review our assumptions in the US in the second quarter each year, and we completed that process last quarter. Therefore, no adjustments are necessary at this moment. Regarding the liquidity issue you mentioned, during the first nine months of the year, we had to address about €8 billion in liquidity needs for collateral reasons. We manage this through asset sales in part, which is part of our liquidity management strategy. Even though we had to secure significant liquidity during this period, we have maintained very high cash liquidity buffers in our companies as part of our strong liquidity management policy. We aim to sustain a level that can withstand a 300 basis point increase in interest rates—an immediate shock of 1.5% and a further 1.5% over the course of a year. Although the situation has not been business as usual due to the rapid rise in interest rates, we have developed plans for this and have managed the situation remarkably well.
David Barma, Analyst
Thank you.
Operator, Operator
Thank you for your question. We are now taking our next question. The next question from Michael Huttner for Berenberg.
Michael Huttner, Analyst
Thank you. I have three questions. The first concerns the expected capital generation from the VA. It seems that approximately half of this is projected to occur over the next five years, and I'm uncertain about the exact figure, which I believe is around 400 million. Additionally, how much capital will remain over this period? If we begin with 1.1 billion and add 300 million, that totals 1.4 billion. Will the capital allocated for the next five years continue at this pace, or will it become less attractive as it matures? My second question is about the cost associated with the reinsurance transaction in Bermuda. Is there a loss that needs to be deducted? In other words, although you may be generating an additional 50 million in capital from the VA move, should I also factor in any losses elsewhere? Lastly, regarding reinsurance, I noticed that one of your peers recently announced a surprising 2.1 billion reduction in solvency due to lapses. I would like to confirm whether Aegon faces a similar risk and if your lapse assumptions are close to zero. Thank you.
Lard Friese, CEO
Thank you very much, Michael. Duncan will address the first two points regarding the VA piece. Then, I believe Matt will cover the TLB and your last point. Matt, perhaps you should start with those two last ones, or if you prefer, you can do the first one. Duncan, please begin with the VA piece.
Duncan Russell, Chief Transformation Officer
I think, I got your question Michael. And you're right. We think that roughly half the value of the VA block i.e. the value will emerge in the next five years. And that's actually one of the considerations we had when we weighed up transaction and the complexity of that versus keeping it in that, because the value is quite short term and its emergence we felt that the keep scenario had a similar waiting to keep scenario. In terms of how it runs off, roughly as I said, there is a 10% reduction per annum in the policy count. So that runs off relatively stably per annum. What actually happens to the capital obviously is a bit sensitive to markets. So as markets go up over the period that means that the capital runoff less rapidly than the policy count, and if they don't then vice versa. So, capital is a bit more nuanced, because of the influence of markets, but the book is running off quite rapidly and as I said roughly half of value is most in the first five years.
Matt Rider, CFO
I'll take the next one. So this is on the cost of the reinsurance transaction between TLB and Transamerica Life Insurance Company, the legal entity in Iowa. So in general from – I think easiest to talk about it from an operating capital generation perspective. So this is sort of a left pocket, right pocket thing. So you can think of Transamerica Life, Bermuda operating cap gen will come down by 30. US operating cap gen will come up by about 30, and it's a wash. Obviously, nothing is really happening economically, although the reinsurance transaction does allow us to release capital more quickly through this mechanism, which is part of the point in doing this. The other one that you had mentioned was that, yes, there was a company in the US that had announced a significant charge as a result of revising lapse rate assumptions on secondary guarantee universal life contracts. And you are correct that, it happened again in the second quarter. So we kind of say, the same thing here. We are already operating under a granular lapse rate assumption where for the secondary guarantee universal life business, the business is quite sensitive to lapses, specifically at the older ages, specifically with higher face amounts and specifically if they're we say in money. And in this case we are – we have let's say over age 80 which is a very sensitive group. We have lapse rates that are less than 1% for policies that are age 80 and over $1 million in face amount. Our lapse rate is 0.5%. And if they're in the money in other words no account value but remaining to pay premiums, which is particularly sensitive we take a quarter of these levels. So we are already at the most sensitive areas close to a zero lapse rate. So this is something that we have taken care of over the years and we continue to update it every second quarter if there are changes then we make them, but we're already on very granular lapse rate assumption.
Michael Huttner, Analyst
And just a reminder how much is this – any adjustments you made in Q2 how much it did cost back then?
Matt Rider, CFO
It was a very small amount, really negligible on our balance sheet for IFRS purposes. I think it was around 200 million or something like that.
Michael Huttner, Analyst
Thank you so much. And thanks for all the lovely answers. Thank you and good luck.
Operator, Operator
Thank you for your question. We are now taking our next question from Ashik Musaddi from Morgan Stanley.
Ashik Musaddi, Analyst
Thank you and good morning, Lard, Duncan, and Matt. I have a couple of questions. First, can you provide the capital generation or cash flow numbers from the TLB and VA business, considering you are retaining it and would have better visibility on the cash flows? What are the expected cash flows from this business going forward each year? Additionally, you mentioned the decline pattern; any details on that would be helpful. Secondly, Matt, you noted that the decision on when to upstream the capital release from the TLB transaction will depend on our visibility regarding the need for growth or investment in the US business. How long do you anticipate we will need to wait for that clarity? I'm trying to understand how long this capital will remain in the US business, or if it’s feasible to consider a timeline of two to three quarters before it is taken out. Thank you.
Matt Rider, CFO
Yes, Ashik. I believe we will be able to provide more clarity on both of your questions at the Capital Markets Day we plan to hold in the second quarter of next year. For now, I can share some basic information. Last year, OCG in TLB was around €70 million. As I mentioned, we expect that to decrease by 30, and I believe it will increase by 30. Regarding the upstream cash, we are currently working on our planning. Our strategic planning every year anticipates a certain level of growth, and we will have better visibility as we move into next year. We will update everyone at the Capital Markets Day in Q2.
Ashik Musaddi, Analyst
That's great. Thanks, Matt.
Operator, Operator
Thank you for your question. We are now taking our next question. The next question is from Michele Ballatore from KBW.
Michele Ballatore, Analyst
Yes, thank you. I have two questions. First, this appears to be the second consecutive quarter where you have managed to capture surplus capital from other entities, similar to what you did in the second quarter. Can you provide some insight into how much surplus capital remains unclaimed? My second question relates to today's transaction, which has lowered the revenue volatility from fees associated with the equity market. Do you have a low sensitivity to interest rates regarding capital? What factors are you most concerned about when considering volatility in capital and results at this time? Thank you.
Lard Friese, CEO
Thank you Michele. Matt?
Matt Rider, CFO
So regarding the first question, how much more surplus capital do we have across our units? The situation with TLB was quite unique. We initially considered a transaction there but realized it wasn't the best approach and instead opted for a reinsurance solution. In this instance, we had previously identified the potential to optimize TLB through a transaction or turning it into a financial asset, which we ultimately chose to do. Therefore, this is a unique circumstance. More importantly, what you're witnessing is our active management of capital, particularly concerning financial assets. Duncan already outlined the steps we've taken in the US related to our VA business, long-term care, and life block, and we will keep advancing these efforts. It's ingrained in our approach to maximize the value of our financial assets. As for capital volatility, the largest source of volatility remains the equity side of our balance sheet. We've recently implemented actions to lessen this volatility going forward, including establishing a voluntary reserve on the VA book. We prefer this method over hedging the equity risk in base fees. Thus, while this remains the key area of sensitivity, we've taken significant steps to mitigate the impact of financial markets on our capital ratios, as improving the quality of our capital over time is a fundamental goal.
Operator, Operator
Thank you for your question. We are now taking our last question is from the line of Nasib Ahmed from UBS.
Nasib Ahmed, Analyst
Good morning. Thank you for your questions. I have two. First, I would like clarification on the TLB transaction. When looking at the reinsurance transaction on its own, I see that you've released €600 million of capital, but wouldn't that capital eventually come off TLB over time? So, are you indicating that your OCG net result is zero when considering both sides? When I think about the retro transaction, it seems like an acceleration of your capital generation. I'm curious about what's happening at the group level. Why is there no negative impact on OCG? Perhaps it's due to the new business. I don't believe you're running your businesses in a typical manner. Could you clarify that? The second point is regarding the debt carrying effect on the group solvency number. Is that a result of higher interest rates? Do you anticipate that it will improve in the next quarter? Thank you.
Lard Friese, CEO
So Matt can you take both?
Matt Rider, CFO
Yes. Regarding the TLB reinsurance deals, I mentioned that there's a shift in operating capital generation between TLB and TLA for the US business, which is 30-30. However, the reinsurance transaction enables us to potentially increase the level of remittances, creating cash flow more rapidly than if we had left the business stagnant. This is why we find the transaction attractive. Our approach to financial assets is to expedite capital release, and this reinsurance transaction will facilitate that. Concerning debt tiering, we've observed a decrease in the SCR due to rising interest rates and management actions. We've also encountered some limitations with Deferred Tax Assets (DTAs) in both the US and the Netherlands, which relate to regulatory recognition of DTAs and available capital. While we still hold these DTAs and can recover them from the relevant tax authorities, these limitations are a non-economic aspect we're addressing at this time. Importantly, these ETAs are recoverable over time.
Nasib Ahmed, Analyst
Thank you, guys.
Operator, Operator
Thank you for your question. We have no further questions and I will now turn the call back over to Jan Willem Weidema for closing remarks.
Operator, Operator
Thank you operator and once more apologies to everyone for the technical issues you have encountered. We conclude today's presentation and the Q&A session on behalf of Lard, Matt, Duncan and myself I want to thank you for the interaction. If you have any remaining questions then please reach us to us at Investor Relations and we're happy to tell you. Have a good day and thank you for participating in the call.