Earnings Call Transcript
AEGON LTD. (AEG)
Earnings Call Transcript - AEG Q2 2021
Operator, Operator
Good day, and welcome to the Aegon Second Quarter 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 Weidema, Head of Investor Relations. Please go ahead, sir.
Jan Weidema, Head of Investor Relations
Thank you, Stewart. Good morning, everyone, and thank you for joining this conference call on Aegon's second quarter 2021 results. You would appreciate it if you could take a moment to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. With me today are Aegon CEO, Lard Friese; Chief Transformation Officer, Duncan Russell; and CFO, Matt Rider. Let me now hand over to Lard.
Lard Friese, CEO
Thanks, Jan Willem, and good morning, everyone. We appreciate that you are joining us on today's call and look forward to updating you on our second quarter results. In my part of the presentation, I will take you through the strategic highlights and through the progress we have made on our strategic assets. Our Chief Transformation Officer, Duncan Russell, will take you through the actions we are taking on our U.S. variable annuity business, and Matt Rider will then go through the details of the results and our capital position. Finally, I will conclude the presentation with a wrap-up, after which we will open the call for a Q&A session. So let's move to Slide 2. We have made steady progress on our strategic priorities and financial targets, and I'm encouraged to see this reflected in our second quarter results. Economic recovery aided by increased vaccination rates supported our results. The second quarter of 2021 saw an increase in the operating result across all segments driven by expense savings, increased fees due to higher equity markets and normalization of claim experience in the United States. We have made good progress on the implementation of our expense savings program and have seen a €220 million reduction in annual addressable expenses through the second quarter. This strengthens our confidence in our ability to deliver on the 3-year target of €400 million expense savings. Our balance sheet remains strong, with the capital ratios of all 3 main units currently above their respective operating levels. We have made steady progress in managing our financial assets during the second quarter. We launched a program that offers certain variable annuity customers a lump sum payment in return for surrendering their policies. Furthermore, we plan to dynamically hedge the remaining legacy variable annuity portfolio for equity and interest rate risks. These two initiatives will create value by releasing capital at terms we believe are favorable compared to other alternatives and increases the predictability of the capital that the business generates. By introducing new innovative products, expanding distribution and enhancing customer service, we are driving growth in our strategic asset category. We achieved double-digit sales growth in U.S. Life, delivered another quarter of strong sales in U.S. middle-market retirement plans and almost doubled the net deposits in our U.K. workplace business. We continued our strong growth momentum in the Netherlands with record high levels of both mortgages under administration and assets under administration in new style-defined contribution pensions. Aegon Asset Management also continued its growth track record of positive third-party net deposits, as strong demand for our solutions, both in our wholly owned business and in our Chinese joint venture continues. In our ESG portfolio, Aegon Asset Management and its partners have helped to fund investments in affordable and workforce housing units in the United States to better serve our local communities. We've also continued to improve our risk profile, having already executed around two-thirds of our planned management actions to reduce interest rate risk in the United States. The progress we are making on our strategic priorities and financial targets provides us with the confidence to accelerate the increase in dividends on our path to pay around €0.25 per common share by 2023. Therefore, we are announcing today an increase of our interim dividend by €0.02 to €0.08 per common share. Furthermore, the strength of our balance sheet allows us to take another step towards achieving our deleveraging target. We are therefore announcing the redemption of USD 250 million professional capital securities in the third quarter. Let me now give you an overview of where we stand with the execution of our operating plan on Slide 3. Our ambitious plan comprises more than 1,100 detailed initiatives designed to improve our operating performance by reducing costs, expanding margins and growing profitably. We have continued the rapid pace and execution rhythm throughout the second quarter. We've been successful in doing that, as we have completed another 110 initiatives in the second quarter, bringing the total to over $500 million. This means that 45% of all initiatives have now been fully implemented, and they will contribute to the operating result over time. Expense savings initiatives have already delivered €220 million of savings, which is more than half of our €400 million expense reduction target. That strengthens our confidence in our ability to deliver on the target for 2023. Initiatives aimed at improving customer service, enhancing years of experience and launching new innovative products are also well underway. These growth initiatives contributed €26 million to the operating result in the second quarter of 2021. We intend to continue the rapid pace and intense organizational rhythm throughout the remainder of the year and beyond. Let's turn to Slide 4 to discuss the progress we have made with respect to our strategic assets. Our priority here is to grow the customer base and expand our margins. In U.S. Individual Solutions, we have the ambition to regain the top 5 position in selected life products over the coming years. In the second quarter, improving commercial momentum resulted in a 24% increase in new life sales. World Financial Group increased the number of licensed agents by 13% compared with the second quarter of last year. We also expanded our market share in this distribution channel through the addition of a new funeral planning benefit. Furthermore, whole life final expense sales increased by 39%, following enhancements made to both the products and the application process. Volume growth, a more favorable product mix and lower expenses resulted in a 40% increase in the value of new business. The U.S. retirement business, Transamerica, aims to compete as a top 5 player in the new middle market sales. This business continued to build momentum, with the fourth consecutive quarter of written sales of over USD 1 billion and the second consecutive quarter of positive net deposits. Written sales were supported by pooled plan arrangement contract wins, which are a strategic growth driver. Sales from these types of arrangements more than doubled and now represent more than one-third of this quarter's middle market sales. So let's turn to the Dutch strategic assets on Slide 5. We are a market leader in both mortgage origination and new style defined contribution pensions, and we continued our momentum in the second quarter. We originated €2.9 billion mortgages in the second quarter benefiting from a strong housing market. Mortgages under administration reached a record high of €58 billion. In our Workplace business, we saw a 20% increase in net deposits for new style defined contribution products. Assets under management for this business surpassing the €5 billion mark for the first time and is scoring Aegon's leading position in this market. We want to develop the online bank, Knab, into a digital gateway for individual retirement solutions. Knab continued its growth trajectory and added more than 5,000 customers in this quarter. In the United Kingdom, assets under administration reached GBP 200 billion for the first time driven by net deposits and favorable market movements. Our aim is to grow in the retail and workplace channels of our platform business. In these channels, we doubled the net deposits to GBP 1 billion, which included a significant Master Trust contract win. This underscores that we are well positioned in this fast-growing market of multiemployer pension schemes. Market movements and expense savings have helped to further improve the efficiency of the platform. By growing the platform business and taking out expenses, we aim to mitigate the impact from the gradual runoff of the traditional portfolio, which is the driver behind the annualized revenues lost from net deposits for the quarter. So let me turn to our global asset management and our growth markets on Slide 6. In our Asset Management business, we aim to significantly increase the operating margin of the Global Platforms business by improving efficiency and driving growth. Third-party net deposits on the Global Platforms were €2.1 billion driven by significant net deposits in various investment strategies in the fixed income platform. The operating margin of the Global Platforms business increased by nearly 2 percentage points. This resulted from higher revenues from net deposits, favorable market developments and higher origination fees in Aegon's Real Assets business. These origination fees were driven by responsible investing mandates in workforce and affordable housing. Net deposits and strategic partnerships were €815 million for the quarter driven by our joint venture in China. Increased performance fees and management fees from growth of the business led to a significant increase in the operating result for strategic partnerships to €56 million. In Aegon's growth markets, we continue to invest in profitable growth. The value of new business from new life sales increased by 6% mainly driven by higher sales in Brazil, Spain and Portugal. New premium production for property and casualty and accident and health insurance increased to €28 million as a result of new products launched in Spain and Portugal. Here, sales from our Spanish bancassurance partners are benefiting from the redesign of the digital sales channels to accelerate the digital transformation and insurance distribution. These actions supported the doubling of sales through the digital channels to over 15% of the total production in June. In summary, on Slide 7, we are making steady progress in growing our strategic assets. We will continue to drive efficiencies while at the same time investing in products and services to our customers in the various core businesses. And with this, I would like to hand it over to Duncan, who will talk about the actions we've taken regarding our U.S. Travel Annuity business. So Duncan, over to you.
Duncan Russell, Chief Transformation Officer
Thank you, Lard. At our Capital Markets Day, we laid out our intention to maximize the value from our financial assets by accelerating, increasing or derisking the cash flow of these blocks of businesses. To date, we have focused our resources on identifying and implementing unilateral actions, steps we can take ourselves and bilateral actions, steps that we can take in conjunction with other stakeholders. I would now like to highlight two recent actions that we have taken on the Variable Annuity business, which in total had USD 85 billion of account value. These actions demonstrate our approach to managing our financial assets. The two actions we are announcing today are aimed at reducing our risk exposure to the legacy block of business with income and debt benefit riders. The first action is targeted at the GMIB block of business. This is a mature block of business with an account value of USD 6.5 billion and mainly consists of policies sold by Transamerica from the 90s until 2003. The associated guarantees were not originally priced, nor subsequently managed on a risk-neutral basis. And therefore, despite being less than 10% of our variable annuity assets, the GMIB riders alone consume about 40% of the required capital of the variable annuity book. In mid-July, we launched a buyout program for the GMIB customer base, whereby we offer customers a lump sum payment in receipt of surrendering their policies. This may be an attractive choice to some customers given that their needs may have changed since they originally purchased their policies about 20 years ago. On our side, we compare the cost and benefits of this program with our alternatives, including running the block off over time or transacting with a third party, and we see the buyout program as an attractive way to reduce our financial market risks and create value by releasing capital at a reasonable price as we buy out the policies below the economic value of the liability. This initiative is aimed at reducing our GMIB exposures, achieving a 15% take-up rate once it is fully completed, it will be a good outcome. There is uncertainty around that, and we will not have a better sense of the actual take-up rate until the fourth quarter of this year. As we get more insights, we'll update you on the program's progress. Second, we have decided to expand our dynamic hedge program to cover the GMIB DB block of business, meaning that, going forward, all of our variable annuity liabilities will be dynamically hedged for equity and interest rate risk. The expanded hedge will build on the dynamic hedging program we have already in place for the GMWB book. That program has been running since the mid-2000s with a good track record and achieving hedge effectiveness for the targeted risks of above 95%. We will incur the expansion as of the fourth quarter when we have more clarity on the outcome of the buyout program, and that will drive the amount of hedging we will need to do. During the third quarter, we are adjusting the existing macro hedges to smoothen the transition to full dynamic hedging. The negative financial impact of these two actions, expanding the dynamic hedge and a lump-sum buyout program, it is expected to be less than 5 percentage points on the RBC ratio. That assumes that the market stays around the current levels, and that we do not see extreme market movements before implementation. The impact on the RBC ratio consists of a higher level of statutory reserves as we will include the hedge costs now in our reserves, but a lower level of required capital as our risk has reduced. The lower level of required capital means that the operating capital generation from the VA block will also be slightly lower than otherwise, and less capital will be released over time as the block runs off and because we no longer have an open equity exposure associated with the GMDB rider. We would expect annual operating capital generation to be around USD 50 million lower than otherwise would have been the case. Looking forward, we will be left with a large mature block of Variable Annuity business that is hedged and consumes a relatively low level of required capital. We will continue to explore ways to improve the net present value of the business. On an IFRS basis, these actions are expected to result in a one-time pretax other charge of approximately USD 500 million to USD 700 million in the first quarter of 2021, mostly driven by a noncash write-off of deferred acquisition cost. On Slide 10, I want to touch upon what we mean by dynamic hedging. Put simply, the interest rate and equity risk embedded in the guarantees will be immunized on an economic basis. Therefore, the financial position of Aegon will not, over time, be subject to changes in the value of the legacy guarantees that we have provided to policyholders on this product. One implication is that our statutory reserves will effectively move to a fair value basis and move away from the regulatory prescribed grading to a 3% long-term interest rate assumption. But inherently hedging interest rate risk embedded in the guarantees will mitigate the interest rate sensitivity of the reserves, aligning our capital position and economic view of the liabilities simplifies our management and decision-making around this block of business going forward. I also want to be clear on the two exposures that will remain for our shareholders and why we have decided not to hedge these. First, while we hedge the equity risk embedded in the guarantees, we have chosen not to hedge changes in the present value of the fee income from the base mutual fund contract. We see these as an asset management-type exposure on which we will earn a return over time. This base fee sensitivity is the main driver of our residual equity market sensitivity in the U.S., up 34 percentage points on the RBC ratio for a 25% drop in equity margin. Second, we will remain exposed to risks from changes in realized and implied volatility. We consider hedging this, but concluded that the cost of doing so was onerous relative to the benefits that we bring to our shareholders. The level of implied volatility is an impedance of the valuation of our variable annuity guarantees. Implied volatility tends to be higher than actual realized volatility, which makes it expected to hedge. And despite an implied volatility, it tends to mean revert. Our exposure to realized volatility is caused by the complexity of our liabilities and our Delta hedge program given the nature of the guarantees to our customers. It is costly to fully hedge the impact of realized volatility in the convex instruments like options or variance swaps. Therefore, we have decided to only partially hedge this risk to protect ourselves against the tail risk of extreme market movements. We will explore ways to further reduce our sensitivity to movements in equity implied volatility. In the meantime, this means that periods of higher implied volatility, all else being equal, will lead to a lower RBC ratio and vice versa. Let me wrap up my part of the presentation on Slide 11. Our aim is to proactively manage our risks, exposures and profitability in order to improve the net worth and value of these businesses. We have allocated resources for the defined factors in order to drive this and feel that we are making good progress. The actions that I have described today are significant examples of the measures we are taking. The buyout program for the GMIB block will reduce our exposures and risks on terms we believe are favorable compared to the alternatives. The remaining exposure will be more tightly managed on a risk-neutral basis, thus to ensure that shareholder outcomes are more predictable. We will continue to seek additional ways to create value from our financial assets. This can include additional unilateral or bilateral actions, as those are more in our control, and we can more easily quantify and understand the financial impact of this. But we will now allocate internal resources to investigate our options around potential third-party solutions. We aim to be transparent on our consideration for this topic and how we intend to maximize the value of the variable initiatives. So we will provide an update on our progress sometime in the first half of 2022. With that, I'd like to hand over to Matt.
Matthew Rider, CFO
Thanks, Duncan, and good morning, everyone. On the next several pages, I will take you through the highlights of our second quarter 2021 results and on our capital position. Let me start with the financials on Slide 13. Expense savings, increased fees from higher equity markets and a normalization of claims experience in the U.S. drove the increase of our operating result by 62% from the year-ago quarter to €562 million. Our balance sheet remains strong, with the capital positions of all our 3 main units firmly above their respective operating levels and the group Solvency II ratio at 208%. Cash capital at the holding is in the upper half of the operating range at €1.4 billion. This allows us the flexibility to continue to execute on our transformation as well as to further reduce our gross financial leverage, which stood at €6.1 billion at the end of the second quarter. One of our priorities is the reduction of economic interest rate exposure in our U.S. business. As to the actions discussed by Duncan, we have executed on about two-thirds of our interest rate reduction plan. This primarily involved lengthening the duration of our asset portfolio and extending our forward starting swap program. Another priority is proactively managing our long-term share portfolio. In the second quarter, we obtained approval for additional rate increases worth USD 64 million. This brings the total to USD 176 million and means that we have already achieved over 50% of our $300 million target. Let me turn to Slide 14 to go into more detail on the expense savings. At our Capital Markets Day, we announced our plan to reduce addressable expenses by €400 million. In the last four quarters, we reduced addressable expenses by €245 million compared with 2019. €220 million of these savings are driven by the expense initiatives as part of our operational improvement plan. We are continuing to execute on this plan and are satisfied to have already delivered half of the expense reduction target. Expenses in this quarter again benefited from lower travel and marketing activities due to the impact of the COVID-19 pandemic. We expect these benefits to reverse over time. Furthermore, we aim to profitably grow our business by improving customer service, enhancing user experience and launching innovative new products. While these growth initiatives resulted in €28 million of expenses in the last four quarters, that contributed €26 million to the operating result in the second quarter of 2021. Let me turn to Slide 15 to share with you the most important drivers behind the increase in our operating results. In the second quarter of 2021, our operating result amounted to €562 million, an increase of 62% compared to the same period last year. In fact, the apples-to-apples increase is 74% at constant currencies and when adjusting for the reclassification of the operating result of Central and Eastern Europe to other income. The operating result not only benefited from lower expenses, but also from higher equity markets. We saw significant revenue growth mainly in asset management and our fee-based businesses in the U.S. Improved investment margins in the Netherlands supported by increased allocation to corporate bonds also contributed to higher earnings. In the U.S. life business, mortality claims experience was €27 million adverse relative to our long-term expectations, which is a significant improvement compared with the second quarter of last year. The adverse mortality experience was largely attributable to COVID-19 as the cause of death. This was offset by €55 million favorable morbidity claims experienced in the long-term care book, which included a one-time reserve release. Correcting for this one-time reserve release, the actual to expected claims ratio was 81% driven by elevated claims terminations as a result of higher mortality. In the U.K., the operating result increased by 19% to €44 million driven by lower expenses and higher fee revenues from growth of the Platform business. The operating results from international increased by €1 million to €34 million. However, on an apples-to-apples basis and at constant currencies, the operating result increased by 60%, reflecting significantly better results in TLB and Spain and Portugal. Finally, the operating result from asset management nearly doubled to €71 million, mostly driven by our Chinese asset management joint venture. The operating result of the Global Platforms increased as well because of higher revenues from net deposits and favorable market. Let's turn from operating results to net results on the next slide. As you can see on Slide 16, the net result amounted to €845 million for the second quarter of 2021. Non-operating items contributed a gain of €644 million before tax. Fair value gains amounted to €468 million and were largely driven by private equity and real estate revaluations in the Americas and the Netherlands. In addition, the macro hedge program in the Americas delivered a gain as a result of the macro interest rate hedge paying off as interest rates declined. We realized gains on investments of €162 million mainly due to gains on debt securities in the U.S., which were sold to fund investments on long-duration assets as part of the interest rate risk management plan. Once again, we benefited from a benign credit environment, with net recoveries of €15 million. Other charges amounted to €153 million and mainly resulted from more conservative assumptions for variable annuity surrender rates to reflect portfolio and industry experience. Onetime investments related to the operational improvement plan, along with the charge related to settlements of litigation in the Americas, were almost fully offset by the release of a provision in the Netherlands following a settlement related to a coinsurance contract. I'm now turning to Slide 17 to go through the capital positions of our main units. The capital ratios of our 3 main units ended the quarter above their respective operating levels. The U.S. RBC ratio increased by 16% during the quarter to 444%. The RBC ratio was positively impacted by higher equity markets and by positive private equity and real estate revaluations. The RBC ratio benefited from management actions, including the sale of an alternative asset portfolio. In the Netherlands, the Solvency II ratio of the Dutch Life unit increased by 23 percentage points to 172%. This increase reflects benefits from management actions, model updates and favorable market movements. The main management action in the Netherlands was a settlement related to a coinsurance contract. This led to a release of a technical provision and a reduction in required capital. Model updates related to refinements of asset and expense modeling, real estate revaluations and favorable interest rate movements also contributed to the increase in the ratio. Operating capital generation had a positive impact and more than offset the €25 million remittance to the group in the second quarter. Scottish Equitable, our main legal entity in the U.K., increased its solvency ratio to 163%. This increase was primarily driven by a forthcoming increase in corporate income tax rate, which led to a reduction in required capital. Let us now turn to the development of cash capital at the holding on the next slide. Cash capital at the holding increased during the quarter driven by remittances from our units. Some units paid their half yearly remittance during the second quarter, including the U.S. In addition, we received regular quarterly remittance from the Dutch Life unit. After deducting funding and operating expenses at the holding, this results in free cash flows of €175 million for the quarter. Proceeds from the divestment of Transamerica's portfolio of fintech and insurtech companies were partly offset by minor capital injections into some country units. Cash capital at the holding closed the quarter at €1.4 billion, which is in the upper half of the operating range and provides the group sufficient financial flexibility to both execute on the transformation program and to continue efforts to reduce financial leverage. Furthermore, we expect to inject capital into one of our growth markets, Brazil. We will contribute approximately €40 million to enable the business to absorb adverse claims experienced from COVID-19 while maintaining a strong balance sheet to support its current growth trajectory. This brings me to my final slide regarding our delivery on capital deployment commitments. At our Capital Markets Day, we guided for a muted near-term dividend growth. Since then, we have made steady progress on our strategic priorities and financial targets. This supports an increase in the interim dividend by €0.02 compared with last year to €0.08 per share. Finally, we continue to reduce the gross financial leverage, as we have announced today our intention to redeem USD 250 million in perpetual capital securities. After the redemption, we will have reduced our gross financial leverage by approximately €700 million since the second quarter of 2020 to €5.9 billion. This puts us on track to achieve our target to reduce gross financial leverage to between €5 billion and €5.5 billion by 2023. With that, I pass it back to you, Lard.
Lard Friese, CEO
Thanks, Matt. And thank you also, Duncan. I would like you all to take away from today's presentation that we are making steady progress on our strategic priorities and our financial targets. We have increased our operating results supported by all segments. We are implementing our operational improvement plan initiative by initiative and are maintaining an intense organizational rhythm. We have achieved more than half of our €400 million expense savings target for 2023. We are increasing the value of our variable annuities portfolio through a lump sum buyout program and by extending the dynamic hedging program. This also allows us to allocate internal resources to investigate our options around potential third-party solutions. And we are maintaining our commercial momentum in our strategic assets. Lastly, we continue to work together with the Vienna Insurance Group to close the divestment of our businesses in Central and Eastern Europe. VIG is in constructive talks with the Hungarian state and has indicated that they are confident that the matter will be resolved in the near term. In summary, I am pleased with the results we announced today and how we are progressing steadily on our strategic commitments and financial targets. I would now like to open the call for your questions. Operator, please open for the Q&A.
Operator, Operator
The first question comes from Andrew Baker from Citi.
Andrew Baker, Analyst
So the first on the U.S. risk management actions, wondering if you could give us a sense of the capital that you expect to be released from the expansion of the dynamic hedge and also the lump-sum buyout program. And then secondly on just your target. So obviously, it looks like you're on track to well exceed the guidance you had on OCG for both 2021 and potentially 2023 as well as maybe free cash flow. So I was just wondering if you could just give an update on what your expectations on those metrics are.
Lard Friese, CEO
Thank you very much, Andrew, for your questions. The first one will be taken by Duncan and the second one by Matt. So on U.S. risk management actions, Duncan?
Duncan Russell, Chief Transformation Officer
Thank you, Andrew. As indicated, we believe the net impact of the two will result in at least a 5 percentage point decrease in the RBC ratio. Within that, we anticipate a small positive effect from the buyout program and a small negative effect from the implementation of the dynamic hedge. The statutory capital in the VA block today has been around USD 2 billion, and we expect that to decrease to approximately $1.4 billion once we implement the dynamic hedge.
Lard Friese, CEO
Okay. Matt, the...
Matthew Rider, CFO
Yes. Regarding operating capital generation and the remittance outlook, I want to remind everyone that during the Capital Markets Day, we indicated an expectation of €1.1 billion in operating cash generation from our business units. In the first quarter call, I updated that expectation to approximately €1.4 billion. Given our operational progress and other favorable trends we've anticipated for the second quarter, including less severe COVID-related mortality impacts, we now expect operating capital generation to be between €1.4 billion and €1.5 billion. As for remittance guidance, we had projected a cumulative total of €1.4 billion to €1.6 billion through 2023 at the Capital Markets Day. At this point, we are not adjusting our remittance guidance but believe it is likely to be at the upper end of that range rather than the lower or middle. I think that's...
Operator, Operator
We will now move to our next question from David Barma from Paribas.
David Barma, Analyst
The first question is about the measures concerning the VA block. The initial impacts are quite clear, but you also mentioned the goal of improving predictability for this business line. It’s challenging to assess the capital generation of the variable annuity block. Can you explain how to consider the volatility of the metrics in that block following the actions announced today? The second question pertains to the Dutch solvency ratio. Could you help us understand the components involved in the second quarter?
Lard Friese, CEO
Thanks, David. So on the VA question, Duncan. And then the Dutch ratio, Matt. So, Duncan, please, over to you.
Duncan Russell, Chief Transformation Officer
You are correct, David, that one of our key philosophies has been to minimize the volatility associated with our capital base and capital generation. For our financial assets, this is a crucial consideration. After implementing the dynamic hedge for the variable annuity block of business, we anticipate a decrease in capital generation. We have projected that operating capital generation will be approximately USD 50 million lower, estimating it will range from $250 million to $300 million going forward. This level of capital generation is expected to be of higher quality because we will have mitigated the risks related to the guarantees in this business segment, leaving us with volatility primarily from the base contracts. We believe this is akin to income derived from asset management fees, as it reflects the fees we collect on the underlying mutual funds. About half of the capital generation will stem from this source, with the remainder arising from the release of required capital earned on reserves and similar factors, which we also consider a higher quality capital generation source. I hope this addresses your question.
Lard Friese, CEO
So Matt, please?
Matthew Rider, CFO
For the Dutch solvency ratio, I agree with you. We started the quarter with a 149% solvency ratio. We generated some operating capital, adding 2% to that. Additionally, we experienced market variances mainly due to interest rate movements. Interest rates declined, and the yield curve flattened, along with real estate revaluations, which contributed about 2 percentage points to the solvency ratio. Combining these factors, the markets added around 6 percentage points. We also took some management actions, including settling a litigation related to a coinsurance contract in the Netherlands, which increased the ratio by 5 percentage points. Changes to the fixed income portfolio, particularly a reduction in structured credit exposure, added 2 percentage points. Furthermore, we updated various models and assumptions, contributing 10 percentage points. Overall, this brings us to an ending quarter solvency ratio of approximately 172%.
Operator, Operator
We'll now take our next question from Ashik Musaddi from JPMorgan.
Ashik Musaddi, Analyst
I apologize, I was on mute. I have a couple of questions. First, the two actions you're taking seem to negatively impact RBC ratio, operating capital generation, and financial metrics, including IFRS numbers. While I understand these actions reduce risk, which is positive and could help your cost of equity, do they also facilitate your exit from that business eventually? Once you've completed the challenging aspects like hedging, does that make it easier to sell that financial asset, or does it not affect that possibility? I'd like to hear your thoughts on whether you'll be inclined to exit after all that effort, or would you consider selling for cash instead of just returning 1x? Secondly, to Matt, regarding capital generation, you mentioned you're targeting between €1.4 billion and €1.5 billion currently. I'm surprised by this as interest rates have declined since our earlier discussion about €1.4 billion in the first quarter. Can you elaborately explain the factors contributing to this increase, especially since interest rates have decreased in the second quarter? Additionally, is this a sustainable run rate moving forward, or does it include one-off items?
Lard Friese, CEO
Thanks, Ashik. So Duncan, on the VA, please, and then Matt will indeed take the capital generation question.
Duncan Russell, Chief Transformation Officer
Ashik, let me break down my response. Firstly, the two initiatives we've announced today are significant and are expected to add substantial value for our shareholders. We're focused on these initiatives because we have quickly identified ways to create value and execute on them. This focus on bilateral and unilateral actions is part of that strategy. While you noted a slight negative impact on the RBC of up to 5 percentage points and a small decrease in future operating capital generation due to limited capital release, we believe these drawbacks are outweighed by the benefits of improved predictability, certainty, and risk management. Additionally, aligning our statutory reserves and capital with a risk-neutral economic view of liabilities simplifies our decision-making process, as our economic and capital perspectives are now congruent. I agree that these actions are beneficial as we move into considering third-party transactions. With the statutory capital transitioning to a more economic basis, we expect third parties will view it favorably. Concurrently, we are reducing the size of the GMIB business through the buy-out program, effectively reclaiming liabilities below their economic value. We're now entering the phase of assessing third-party opportunities, and we will approach this rationally, aiming to enhance the predictability and quality of our cash flow and risk management. There are additional factors to consider, such as potential capital implications and synergies from reducing the VA block, as well as the counterparty risks associated with it. This is particularly important given the size of the exposure. The structure of the VA block within a single legal entity presents challenges in how we might extract it, but we will maintain a rational perspective on its value. Lastly, as I mentioned earlier, the VA block remains a significant factor in our overall financial structure, expected to generate around USD 250 million to USD 300 million annually while consuming about $1.4 billion of capital after the hedge implementation. We need to consider all these factors as we move forward in the coming months and quarters, and we look forward to updating you in the first half of 2022 on our evaluations.
Matthew Rider, CFO
I can address the operating capital generation. We are guiding towards €1.4 billion to €1.5 billion for the full year. Notably, we have observed a slight decline in interest rates since the first quarter, decreasing by about 30 basis points in the second quarter and possibly another 10 basis points now. However, it's important to note that our operating capital generation in the U.S. is not heavily impacted by interest rate fluctuations. Our sensitivity lies more with equity markets, which have been performing well, contributing to the anticipated increase in operating capital generation for the rest of the year. Regarding our run rate, the second quarter serves as a solid baseline. We generated €376 million in operating capital after accounting for holding and funding expenses; when adding that back, it totals €435 million, plus some positive one-offs. We did see favorable mortality and morbidity results in the U.S., along with additional tailwinds from Europe. A more refined estimate for a typical quarter would be around €380 million for the business unit's operating capital generation. In the first half of the year, we achieved €723 million. If we calculate by adding twice the €380 million, we align with the €1.4 billion to €1.5 billion range. Considering potential COVID impacts in the latter half of the year, we have anticipated about €20 million in additional COVID claims, but no positive morbidity experience has been factored in. Thus, the estimate of €1.4 billion to €1.5 billion appears to be conservative.
Operator, Operator
Fulin Liang from Morgan Stanley.
Fulin Liang, Analyst
Very good set of results. I have two questions. First, regarding the VA, you are approaching your current customers to buy out the policies. I assume you have gained regulatory approval for this. How do you assess the litigation risk moving forward? That's my first question. Secondly, you haven't mentioned your plans for the fixed annuity book in the U.S., as that is also an important financial asset. Will a fixed annuity solution be offered alongside the variable annuity book solutions, or is it a separate consideration?
Lard Friese, CEO
Yes. Thanks, Fulin. So Duncan, over to you.
Duncan Russell, Chief Transformation Officer
The key aspect of the buyout program is that we are giving our customers a chance to enhance their policies in exchange for cash value. As I mentioned, these products were sold quite some time ago, in some instances even 20 years back, and our customers' situations may have evolved during that time. They have the option to exchange or surrender their policy for a cash payment that exceeds their account value, which could be appealing to them. Ultimately, it is their decision, and they will consult with their advisers on this matter. Prior to launching the program, we engaged with advisers to gather their insights, and we have received constructive feedback since then. However, it's still early, and we need to monitor how things develop in the upcoming months. On our end, as noted, the buyout offer is somewhat lower than the economic value of the guarantees for us, which we believe is advantageous for our shareholders. Regarding the fixed annuities, yes, it is possible they could be associated with variable annuities. We have just begun to explore transaction possibilities and other considerations related to third-party solutions for the variable annuity segment. The fixed annuity segment is also a financial asset and may contribute to any liquidity considerations we have regarding the variable annuity segment, but we will evaluate this as we move forward in the coming months and quarters.
Operator, Operator
We'll now move to our next question from Michael Huttner from Berenberg.
Michael Huttner, Analyst
I have two questions, but I think, actually, can you say the various measures in the U.S. and the updated guidance on operating capital generation, what does it do to the U.S. cash remittance, which I think was $209 million in the first half? And at what stage when can we see a meaningful rise in this regard? What I'm trying to say is, could we see it already in the first half of '22 or the second half of '23? And the second question is on the buyout program. So the figures you've given are based on the 15% assumption. Can you give a little bit of a sensitivity around that figure, what if it goes to 20%, what would be the benefit? That's my two questions.
Lard Friese, CEO
Thank you very much, Michael. Let's start with the U.S. cash remittance question, Matt Rider. And then followed by your question on the program by Duncan.
Matthew Rider, CFO
In the second quarter, the U.S. remitted $209 million, which is typical for them. They also sent €18 million in the first quarter. While our outlook for U.S. remittances remains unchanged, it's significant to note that we are increasing the dividend by €0.02 per share. This increase reflects our operating capital generation, which is expected to be in the $900 million to $950 million range in the U.S.
Lard Friese, CEO
Thank you. Duncan?
Duncan Russell, Chief Transformation Officer
Yes. On the second question, Michael, the dynamic here is that we will be paying out cash if and when the policyholder opts out of that option and releasing associated guaranteed reserves and required capital. And we think that, that dynamic is a slight positive for the RBC ratio as indicated. We're not giving a sensitivity. It is very early in that program, and it depends on which policyholders accept, there are specific characteristics, there are specific circumstances and also how markets develop between now and the uptake of the offer. So if it's okay with you, we'll look to come back in 3Q or 4Q with them for the details.
Michael Huttner, Analyst
And just a follow-up. You said you've spoken to advisers. And clearly, the program was launched about a month ago. Can you say a little bit more about the progress?
Duncan Russell, Chief Transformation Officer
No, in short. You're correct; we have been working on this for several months, and as we launch it, there are many execution details involved. One aspect is ensuring we gather feedback before the launch, and we have received constructive feedback since then. It’s still very early, and customer engagement is necessary. Therefore, we do not expect to have more information until a couple of months from now.
Operator, Operator
And we'll now take our last question from the queue from Farquhar Murray from Autonomous.
Farquhar Murray, Analyst
Just two questions, if I may. Firstly, on capital generation and remittances, you seem to have increased the capital generation target for year '21 by about €0.6 billion versus where we were in December. And on the kind of cash flow remittance side, you seem to be basically talking towards the upper end of the cumulative range, which I think adds about €0.3 billion. Can you possibly just explain whether there's something to that gap between the two? Or is this kind of a bit more of a conversation for the end of the year? And then secondly, turning to the variable annuity actions, and in particular, the RBC and cash flow generation impact. Could you just clarify that those are based on end of June market circumstances? And might you just be able to outline the sensitivities around those impacts, just so we understand how they could vary between here and the closing at the end of the year?
Lard Friese, CEO
Thank you very much, Farquhar. Let's start with Matt on the capital generation question and then Duncan will address the variable annuity question afterward.
Matthew Rider, CFO
Yes. So on the operating capital generation, you said, is it more of a conversation from the end of the year, we'll see how the year turns out. I would just say that so far, the progress has been actually quite good, both in terms of implementing the operational improvement plan, but also the macroeconomics have been favorable for us. So those are the tailwinds. The way we kind of think about it is that we've kind of drastically reduced the downside risk in the overall targets that we put out at the Capital Markets Day. So all that is kind of encouraging. But to be clear, we are still early in the transformation, and we do have a lot of work to do. You could say that we're perhaps late in the economic cycle, and we do want to be cautious about the outlook for credit markets, for example, but also COVID claims if we get into a second wave in the U.S., as we come out of the COVID-19 pandemic. So we're not changing our guidance at this point in terms of remittances, only to say that we are now guiding towards the top end of that gross remittance guidance for the 2021 to 2023 guidance that we've done at the Capital Markets Day. So we had that at €1.4 billion to €1.6 billion. So now we're thinking more like €1.6 billion. But clearly, the progress that we've made in the capital markets have helped us along here. We are guiding more towards the top end.
Lard Friese, CEO
Thank you very much, Matt. So Duncan?
Duncan Russell, Chief Transformation Officer
Farquhar, no, they're not based on 2Q. They're based on current circumstances. And with respect to additional guidance, it's a bit tricky. And the reason for that is there's obviously quite a few variables here in terms of the take-up rates from the buy-out program, which will in itself may be influenced by equity markets and interest rates. And then also the implementation of the dynamic hedges also the impact of that could be influenced by equity markets and interest rates, plus the fact that we put in a partial hedge several months ago as well, which is on rates that should apply some mitigation. However, we feel fairly confident that, as I have indicated in our presentation, the net of that is going to be no worse than 5 percentage points on the RBC ratio, barring really extreme market movements. So we feel pretty comfortable with that guidance.