Earnings Call Transcript - AEG Q1 2023

Jan Willem Weidema, Head of Investor Relations

Thank you, Sharon, and good morning to everyone. Thank you for joining this conference call on Aegon first quarter 2023 trading update. 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; and CFO, Matt Rider. We will take you through the highlights of the first quarter and the progress we are making in the transformation of Aegon. After that, we will continue with our Q&A session. On that note, I will now give the floor to Lard.

Lard Friese, CEO

Thank you, Jan Willem, and good morning, everyone. We appreciate you joining us on the call today. The format of today's disclosure is different from what you are used to. As previously announced, we have changed the reporting format for the first and third quarters to trading updates. These will focus on sales and capital metrics and we will also update you on the progress that we are making on our strategic priorities. We will, of course, report full IFRS results for the first half year and second half year to align with our reporting cycle. Moving on to Slide number 2, I want to start by highlighting our achievements this quarter. Aegon has had a good start to the year. In the first quarter, we demonstrated strong commercial momentum and advanced on our strategic priorities. I am especially pleased with the progress that we're making in light of the continued global volatility, specifically in financial markets. Preparations for the closing of the a.s.r. transaction continue at pace. And I am confident that we will be able to complete the transaction in the second half of the year as planned. On the strategy front, we continue to make steps in optimizing our portfolio. We have sold our U.K. protection business and divested and liquidated several noncore activities in Asia. At the same time, we strengthened our capabilities in the alternative asset management space. Turning to our commercial results, we delivered strong sales growth in all of our U.S. strategic assets and in our life insurance businesses in China and Brazil. Our U.K. workplace business is gaining traction as growing numbers of new customers are entrusting their retirement savings to us. However, Aegon Asset Management and our U.K. retail business were affected by reduced investor confidence as a result of the challenging market conditions. Against this challenging macroeconomic backdrop, we maintained a strong balance sheet. This is a testament to the work we have done to improve our risk profile over the past years. Therefore, I'm confident that we will deliver on our strategic commitments and on our 2023 financial guidance. I look forward to updating you on our strategic plans and medium-term financial objectives at our upcoming Capital Markets Day on the 22nd of June in London. So let's move to our strategic assets on Slide number 3. First, I would like to highlight the progress made in our Individual Solutions business. As you know, we have the ambition to regain a top five position in selected life insurance products over the coming years. And as you can see, commercial momentum remains strong. New life sales increased by 21% this quarter compared with the first quarter of 2022, largely driven by higher indexed universal life sales. For this flagship product, we have been consistently achieving internal rates of return north of 12%. We further improved the service experience for agents of World Financial Group or WFG. Combined with the continued competitiveness of Transamerica's products, this allowed us to increase our market share in the WFG distribution channel from 58% to 64%. WFG also expanded its distribution reach by growing the number of licensed agents to a record level of close to 67,000, an increase of more than 10,000 agents compared with the prior year quarter. On Slide number 4, we show the decent progress we have made in the U.S. Workplace Solutions business. In the retirement business, Transamerica aims to compete as a top five player in the new middle market sales. Sales momentum remained strong in the first quarter of 2023 with written sales of USD 2.6 billion, double the amount realized in the same quarter last year. The main driver was a pool plan contract win of USD 1.7 billion that included 1,400 individual employer plans. Net deposits for the Middle-Market segment benefited from strong written sales in previous periods and lower withdrawals in this year's first quarter. So now let's move to the U.K. on Slide number 5. Net deposits in the Workplace channel rose by 5% compared with the first quarter of last year to £733 million this quarter as the sales momentum remains strong. In the retail channel, on the other hand, the macroeconomic environment continues to negatively impact investor sentiment. In addition, higher interest rates have reduced the attractiveness to transfer from defined benefit to defined contribution pension plans, reducing gross deposits in this channel. As a result, net outflows amounted to £413 million compared with net deposits of £23 million in the first quarter of '22. Annualized revenues lost on net deposits amounted to £3 million for the quarter, predominantly due to the gradual runoff of the traditional product portfolio, partly offset by revenues gained on net deposits in the Workplace channel. I'm now turning to Slide number 6 for the highlights of the performance of our Asset Management. Market conditions remain challenging, which led to third-party net outflows in both Global Platforms and Strategic Partnerships segments. Within Global Platforms, we attracted net deposits in the Dutch mortgage fund, which were more than offset by net outflows in other asset classes. This was in part driven by redemptions in light of the persistent market uncertainty. Third-party net outflows in Strategic Partnerships amounted to €1.3 billion and mostly occurred in our Chinese asset management joint venture, AIFMC. This reflects subdued investor sentiment and less demand for new fund launches. Operating capital generation in the first quarter of 2023 was negatively impacted by lower revenues as a result of lower assets under management, mainly due to adverse market movements. Let's move on to our Growth Markets on Slide number 7. We continue to invest in profitable growth as evidenced by the 27% increase in new life sales from these markets. This growth was in part driven by our business in China following the relaxation of the country's COVID-19 measures. Operating capital generation of the International segment, excluding TLB, increased by 57% as a result of business growth. On Slide number 8, you are seeing that we continue to maintain a high pace on the transformation of Aegon. Starting with the a.s.r. transaction, we are making good progress with the disentanglement of Aegon the Netherlands from the group. We are confident that the necessary regulatory approvals in order to close the transaction will be received in the second half of 2023 as planned. In the U.K., we have announced the sale of our individual protection book to Royal London. The transaction supports a strategy to focus on further improving and growing the U.K. platform activities by freeing up resources and management time. Outside of our core perimeter, we continue to exit non-core businesses and manage capital tightly. We sold the Aegon Insights activities in Japan and Hong Kong and decided to liquidate our remaining e-broker activities in Indonesia. In our asset manager, we've also made progress on our strategic agenda, with two announcements regarding our collateralized loan obligation or CLO franchise. In the U.S., we entered into a strategic partnership with Lakemore Partners to further strengthen our successful and growing U.S. CLO management activities. Aegon will originate the CLOs, and Lakemore will provide the necessary equity behind these transactions. In Europe, we agreed to buy NIBC's European CLO management activities. The move allows Aegon to expand its successful U.S. CLO franchise into Europe. These transactions cater to our asset management capabilities in the alternative investment space, which is the strength of the business. I now hand over to Matt Rider for the capital update for the first quarter of 2023.

Matt Rider, CFO

Thank you, Lard, and good morning, everyone. Let me start with an overview of our capital position on Slide 10. As a reminder, operating capital generation and free cash flow for this quarter and for the comparative period last year exclude the contributions from Aegon the Netherlands following the transaction with a.s.r. Operating capital generation before holding, funding and operating expenses amounted to €292 million for the first quarter of 2023. The increase compared with the prior year's first quarter reflects business growth and improvement in claims experience and lower expenses. Free cash flow of €47 million mainly reflects remittances from Aegon's asset management joint venture in China. As a result of the previously announced share buyback, cash capital at the holding decreased to €1.4 billion at the end of the first quarter as planned. Our gross financial leverage amounted to €5.6 billion or €5.4 billion based on a euro-U.S. dollar exchange rate of $1.20, which is the rate at which we set our deleveraging target in 2020. This means that we remain within our target range. Against the continued volatile backdrop, the Group Solvency II ratio increased by two percentage points over the first quarter to 210%, driven by capital generation and an increase of diversification benefits. For our three main units, we maintained strong capital ratios with each of them remaining above their respective operating levels. Let me talk to the movements of the capital ratios on Slide 11, U.S. RBC ratio increased by 11 percentage points over the quarter to 436%. This is mainly driven by strong operating capital generation for the quarter, partly offset by dividends to the intermediate holding company. There was a positive impact from market movements and one-time items. These were primarily driven by a tax benefit. As in the previous couple of quarters, the impact of credit impairments and rating migrations on the RBC ratio was negligible. The Solvency II ratio of the Dutch Life unit decreased to 191%, and mainly due to a refinement of the internal model. We adjusted the correlation parameters, which led to an increase in required capital. This is a stock and flow impact because the required capital will be released over time as the business runs off. Market movements also had a negative impact, mainly as a result of lower real estate revaluations and spread movements, the solvency ratio of Scottish Equitable, our main legal entity in the U.K., increased by two percentage points to 171%. Let me now turn to Slide 12 to give you more detail on Aegon's operating capital generation in the first quarter. Total operating capital generation before expenses for holding, funding and operating expenses, was €292 million this quarter. This is an increase of 5% compared with the first quarter of 2022. Earnings on in-force before holding expenses contributed €355 million to operating capital generation, an increase of 17% compared with the prior year's quarter. The increase was driven by Transamerica and reflects improved claims experience, reduced expenses and growth of our strategic assets. The increase in earnings on in-force was partly offset by higher new business strain compared with last year, mainly from profitable business growth in the U.S. Individual Life and Retirement plan businesses. This is in line with our ambition to allocate capital to those businesses where we can build leading positions and generate attractive returns. The release of required capital was higher than usual, mainly as a result of the repayment of a short-term loan. This reduced collateral requirements, which in turn led to a release of required capital. All in all, we remain on track to meet our guidance of at least €1 billion operating capital generation from the units in 2023. On Slide 13, you can see that cash capital at the holding decreased to €1.4 billion during the quarter, which is in the upper half of the operating range. In the first quarter of 2023, we spent a total of €152 million on share buybacks. €109 million of this was a consequence of the €200 million share buyback program that we announced at our fourth quarter earnings release. The remaining €43 million related to buybacks needed to meet our obligations resulting from share-based compensation plans. Free cash flow for the quarter was mainly driven by a dividend from our Chinese asset management joint venture, AIFMC. This was largely offset by capital injections into country units, mainly related to our business in India. Let me now turn the page for an update on our financial assets on Slide 14. Here, we summarize the continued value creation from our financial assets, where we increasingly benefit from the actions we have taken on these books over the last years. In the first quarter, we continued our track record of successfully hedging the targeted risks, embedded in our variable annuity guarantees, achieving 97% hedge effectiveness. In Long-Term Care, our primary management actions are rate increase programs. We have obtained regulatory approvals for additional rate increases worth USD 42 million in the first quarter. The total value of approvals achieved since the start of the program now stands at $513 million, and we will continue to work with state regulators to get pending and future actuarially justified rate increases approved. The Dutch Life insurance business generated €111 million of operating capital generation, more than covering the €75 million in remittances that the business paid to the intermediate Dutch holding company. Let me conclude with some words on the strength of our balance sheet on Slide 15. The start of this year has been volatile as a result of issues in the banking sector in both Europe and the U.S., following continued interest rate hikes from central banks to curb inflation. We have navigated this market environment well, benefiting from the actions that we have taken to improve our risk profile and strengthen our balance sheet. We have significant financial flexibility with strong capital positions in the units and cash capital at the holding near the upper end of the operating range. Next to this, Aegon maintains a conservative and well diversified fixed income portfolio. Our U.S. corporate bond portfolio is defensively positioned with an overweight to higher-rated bonds relative to the benchmark and is diversified across industries. For the banking sector specifically, Transamerica has limited exposure to U.S. regional banks and within the sub-segment has focused on higher rated banks and instruments. In addition, we have a robust liquidity management framework. And as a consequence, we are overweight liquid assets compared to other U.S. life insurance companies. In the Netherlands as well as in the U.S., we are invested in mortgages. The Dutch mortgage book is focused on residential housing with a low loan-to-value ratio of 54% and is known for its very low delinquencies, even in unfavorable economic environments. Similarly, the commercial mortgage loan portfolio in the U.S. has a low loan-to-value ratio of 50%. More than half the book is invested in multifamily residential properties and the book has limited near-term maturities. Our direct real estate exposure in the U.S. and in the Netherlands totaled €6 billion. This is a defensively positioned portfolio with significant investments in residential properties, especially in the Netherlands. The overall direct real estate exposure to office properties across our portfolio is very limited at around €200 million or less than 20 basis points of our combined general account in the U.S. and in the Netherlands. As we look ahead, our financial flexibility and disciplined investment approach put us in a strong position to navigate the current macroeconomic environment and execute on our strategy. And with that final note, I now pass it back to you, Lard, for your concluding remarks.

Lard Friese, CEO

Thank you, Matt. In summary, we are consistently delivering on our strategic and financial objectives. We are on track for closing the transaction with a.s.r. in the second half of the year. We have further optimized our business portfolio and sharpened our strategic focus. We are delivering on new business growth in the Strategic Assets and Growth Markets. And last but not least, we maintain a strong balance sheet and deliver on our commitments to shareholders despite the volatile environment. Therefore, I'm confident that we will deliver on our strategic commitments and on our 2023 financial guidance. And finally, I kindly want to remind you of our Capital Markets Day on June 22 in London, where we will update you on our strategy and targets. The focus of the event will be on our U.S. activities and our path to creating value through profitable growth and active management of the in-force business. We will discuss the next chapter of our strategy, and I hope you will all join us for the event. I would like to open the call for your questions now. Please limit yourself to two questions per person. Sharon, please open the Q&A session.

Operator, Operator

Thank you. We will now go to your first question from Andrew Baker at Citi. Please go ahead.

Andrew Baker, Analyst

Right thanks for taking my questions. So, the first one is just on the Aegon the Netherlands closing. You stay on track for the second half, but are you still thinking this will be July? And then when the deal closes, should we expect a lower holding company cash target range and also lower holding company costs? And then the second one relates to the foundation. Lard, I know both you and Matt actually are on the Executive Committee of the foundation. Just wondering whether there's, been any discussions around the foundation's long-term ownership stake in Aegon when you no longer have any operational presence in the Netherlands? Thank you.

Lard Friese, CEO

Yes. Thank you, Andrew, for your questions. I think I'll take most of it, quite frankly. Let me start by the closing. We're on track. We've always given guidance that we plan to - or we hope to close the transaction in the second half of the year. Last time I checked, July is in the second half of the year, and we are on track to do what we need to do. Now obviously, we are dependent on the regulators to provide their regulatory approvals, and we are working hard to try and obtain them. We're also progressing well for disentanglement activities, as you may appreciate that also with a lot of work. But I would say we're on course for closing the transaction as planned. When it comes to both the situations, both transactions, we have a cash capital target range of €0.5 billion to €1.5 billion, which we have set up. It's quite a wide range. We realize that. And we've set that up at the time of the Capital Markets Day in 2020 because we are - Aegon is undergoing a very substantial transformation and restructuring, and that's a path that will take multiple years in order to ensure that it is delivering the ultimate objective, which is a well-managed, a respected company with advantaged businesses and chosen markets. So, we are operating within that range, and we are standing now at €1.4 billion. Post closing in terms of lower holding company costs, there will be a number of employees that are currently working at the corporate center, that are working predominantly for the Netherlands. They will move to a.s.r. post-closing as part of the transaction. That is what I can say about that. When it comes to the foundation, let me just remind you that the Association Aegon, it's not a foundation, actually, it's an association. The Association Aegon is a stockholder of Aegon N.V. and with a stockholding in the range of, let's say 14%, 14.5%. The origin of that goes back to the creation of Aegon, where Aegon was formed by a mutual company and a listed company with a mutual company contributing its - sold basically its business activities to the listed company with that creating Aegon and receiving stock in that listed company. And that listed company is now called Aegon N.V. So that's where the association is. Matt, anything to add to this?

Matt Rider, CFO

No.

Andrew Baker, Analyst

Right, thank you.

Operator, Operator

Thank you. We will now go to your next question and your next question comes from the line of Michael Huttner from Berenberg. Please go ahead.

Michael Huttner, Analyst

And thank you for these smooth results. I think you said the steadier figures, I'd say, I don't know, more than smooth anyway, two questions. One, the €225 million, I think, of new business strain, which looks like a huge number, if I realize that's €1.1 billion. That's a big investment. Can you share a little bit the characteristics of the payback period for that or the profitability of the IUL just to get a feel for how much profit this will generate? And then the second question is you beat on U.S. mortality, which is lovely. And I just wondered if you can give a little bit of a feeling for how you see U.S. mortality, you're exposed to U.S. mortality developing. It has in the past been - you've done a lot of hedging in the past, I think, two years ago, two and a half years ago. And of course, at the start and during COVID, we had a very big cost related to that. And I just wondered if you can give us a feel for how you see the situation now, whether mortality could now become a positive?

Lard Friese, CEO

Thank you, Michael. Matt?

Matt Rider, CFO

So let me - maybe on the new business strain, let me talk about the - in terms of the U.S. number - so for the - you mentioned the 225 million number, which is for the group, but for the first quarter of 2023, new business strain in the U.S. was 168 million, which is significantly up over - I think, in the first quarter of the previous year, we were at 122 million. So a significant increase in new business strain, but it is very much in line with the increase in the sales so given the fact that typically for the U.S. Life business. We're pricing for internal rates of return at a minimum of 10%, but we've typically been getting more than 12%. So this is exactly where we want to be, in a position where we're generating profitable new business, and that's reflected in the strain that you see in the first quarter of '23. The next one on the beat on mortality, mortality results in the U.S. overall were about $18 million worse than our long-term management best estimate expectations. However, I think you'll recall that in the first quarter, we typically have some bad seasonal mortality. So what's happened in the first quarter is it has not been as bad as what we would typically expect. And of that $18 million, about half of it - only half of it came from direct COVID claims. So what we're seeing is the - direct cause of death, COVID mortality, gradually really winding down and we'll - you asked what the outlook is for the remainder of the year. Our outlook is that we would get on our management best estimate for the full year in total, which would imply a little bit better for the last three quarters of the year.

Michael Huttner, Analyst

And just on the new business strain. Can you just say what, is the payback on this business? Is it really short or long or...?

Matt Rider, CFO

Well, we price - so the minimum requirement that we have is less than 10 years, and we'll be - well below that for the full year.

Michael Huttner, Analyst

Okay, thank you.

Operator, Operator

Thank you. One moment for your next question and your next question comes from the line of Nasib Ahmed, UBS. Please go ahead.

Nasib Ahmed, Analyst

Thanks, good morning. First one just a confirmation on the IRR greater than 12% is that also for retirement plans or is that just for Individual Solutions? Second, Lard, you've been consistent in kind of saying that the transformation for Aegon Group is continuing and on portfolio optimization, you've taken lots of small actions over 1Q? And the U.S. market still seems to be active with some players taking actions, derisking actions there. Can you talk about what optionality you have across the core businesses to further optimize the portfolio? And then on World Financial Group, have you done some analysis that you can share on how the agent numbers track versus peers and how productivity track versus peers? Thanks.

Lard Friese, CEO

Yes, good morning. The first question - I'll take the last two, but first question to Matt.

Matt Rider, CFO

Yes. So the number that I gave you really relates to the Individual Life. And really, the main product that we're selling is an indexed universal life products. So, we're getting - we've typically been getting far over 12%. But on the retirement plans, we actually get even higher than that given the nature of the business.

Lard Friese, CEO

Yes. Regarding the last question about WFG, we are very pleased with the progress of this large agency network. They currently have 67,000 licensed agents, which is 10,000 more than the same time last year. Across the industry, WFG is the fastest-growing network. We are also satisfied with their productivity, which supports the sales growth we are seeing in the traditional life business, particularly with our flagship IUL product. As for your other question about transformation, when we began this journey, Aegon was operating in about 20 markets. We decided to concentrate on several core and growth markets, specifically the U.S., U.K., Netherlands, Spain, Portugal, Brazil, China, and our Global Asset Management business. The other businesses we have are categorized as run type capital and are looking to exit where possible. Since we started, we have been focused on managing that segment to minimize capital consumption and exit when we can. We have shown progress in this quarter as we maintain the focus we established during our Capital Markets Day. We are making a clear distinction between strategic assets, which are product clients aiming for growth, and financial assets, whose goal is to lower capital costs and reduce risk in cash flows, ensuring quicker emergence where feasible. Over the past year, we have made significant progress in managing financial assets and will continue to report quarterly on these advancements. We also plan to improve the risk profile and cash flow emergence of these financial assets through various actions. There’s still ongoing work with noncore businesses, and we are making progress each quarter.

Nasib Ahmed, Analyst

Okay, thank you both.

Operator, Operator

Thank you. We will now go to our question and your next question comes from the line of Sudarshan Bhutra from Societe Generale. Please go ahead.

Sudarshan Bhutra, Analyst

Hi good morning, Two questions from my side. First is on the lapse of the surrender experience in the U.S. business. I mean, any comments on that would be very helpful. Second one is on just a clarification with regards to the dividend upstream to the U.S. intermediate holding company. Now I mean, is this something that you've been doing recurrently in the past? Or is this something of a more recent development? Because I think the only over the - in Q3 and now in Q1, we are hearing about this. So what is the rationale behind this? And why is this happening? So those are my two questions? Thank you.

Lard Friese, CEO

Yes. Thank you for your question, Sudarshan. I'll hand it over to Matt.

Matt Rider, CFO

So on lapses in the U.S. business let's divide it into two things: one is in the Life Insurance business and the other one is in, let's say, fixed annuities, where we look at surrender experience. So on the life insurance side, it's pretty much exactly in line with our expectations. So there's nothing really new there. Fixed annuity side, a topical thing is that with the interest rate rise, are we seeing increased surrenders there? We are, to a certain extent, we've been typically running around 4% annualized over the last several quarters, and that's ticked up a little bit to about 8% annualized. But given the fact that this book is - it's down significantly. I think the account value on it is down to about $8 billion from like $30 billion a number of years ago. This is quite easily managed. With respect to the dividend upstreaming, this is something that we always have to control the timing of in the U.S. businesses. Typically, dividends can be paid out of the U.S. life companies less frequently than they could be in Europe. So for example, you - I think you recognize in the life company, we've grown to like a quarterly dividend; it's more typical to do annual dividends. So, we just retained it in the holding company and that will be upstreamed in the second quarter.

Sudarshan Bhutra, Analyst

Okay. And just one more question, if I may, on the commercial mortgage loan book, actually. I mean in your own book, have you seen any kind of adverse developments in the first quarter or during April and May? I mean that's the question. And how comfortable are you with your book given all the concerns that are there in the market? So sorry, that was just one follow-up.

Matt Rider, CFO

I think we're very comfortable with the book, maybe just to give a little bit of background on this one. We have about $11 billion of commercial mortgage loans, about 54% of that is sitting in multi-family. It's got, on average, a 50% loan-to-value ratio in the - it's basically occupancy rates north of 90%. And in more recent times, we currently have a loan loss provision of only about $12 million on this book currently, and there have been no delinquencies in the first quarter of 2023. So, I think we're pretty solid on the CML book.

Sudarshan Bhutra, Analyst

All right, thank you very much.

Operator, Operator

Thank you. We will now go to our next question and your next question comes from the line of Jason Kalamboussis from ING. Please go ahead.

Jason Kalamboussis, Analyst

Good morning. I have a couple of questions. First, regarding capital generation, excluding one-offs, the run rate appears to be about €270 million, which is higher than the €250 million target. Do you think this trend will continue throughout the year, or might it have been elevated in the first quarter? Additionally, should we expect that the strain observed in Q1 is representative of the situation in the U.S. for the rest of the year? Lastly, concerning international operations, last year in Q1 it was €65 million, and now it's €70 million, factoring in one-offs like the TLB deal. Should we anticipate around €20 million per quarter going forward? Also, I wanted to ask about Knab, which has seen a significant net deposit outflow and a decrease in customers as mentioned in your trading update. Can you provide any further insights on this? Thank you.

Lard Friese, CEO

Yes Jason, good morning. The first three, Matt - maybe I can do the Knab, then - Matt you take the rest. So on Knab yes the outflows. Yes, it has to do, quite frankly, with the fact that Knab is a bank which caters for the smaller part of the SME sector and self-employed people with a package of services or kind of payment services and the like. We are not a price fighter with Knab in - when it comes to savings rates. So that has led - when the market was repricing and basically savings rates went up, we were not the ones who were in the top range of that, so that has led to some outflows. But that's the explanation of that. Matt, the other three, please?

Matt Rider, CFO

Yes. For the OCG guidance, you have our number pretty much spot on. So about €270 million is a clean number for the quarter, and that gives us quite some confidence that we'll be able to meet our guidance that we've given of over €1 billion for the full year. On the new business strain that we saw in the first quarter, we would actually think that, that's going to go up. Really, our sales growth has been continuous here. We like what we are seeing there. We like that we are writing the profitable new business. So I would expect that to go up a bit as the year progresses pretty much in line with what you would expect out of the sales growth. OCG on international, there is some noise in there - some noise in the number, and it relates to the reinsurance transaction that we did between TLB in Asia and the Transamerica Life Insurance Company in the U.S. If you sort of adjust for that anomaly, you would see OCG in the international business is up about 50% over the last year. So that's - I think that's a good result. But there is some noise in the quarter. The €20 million is a pretty decent ballpark number, I think, for the remaining as we look forward. I think that's it.

Jason Kalamboussis, Analyst

Okay thanks, very helpful.

Operator, Operator

Thank you. We will now go to our next question and your next question comes from the line of Ashik Musaddi from Morgan Stanley. Please go ahead.

Ashik Musaddi, Analyst

Can you hear me now? Sorry. Hello.

Operator, Operator

We can hear you.

Lard Friese, CEO

We can hear you.

Ashik Musaddi, Analyst

Yes, thank you and good morning Lard, good morning Matt. Just a couple of questions from me. I mean, if I look at the development in net inflows in U.S. and U.K., I mean, it's a bit different picture. In U.S. Workplace, you have seen a very significant pickup in net deposits in first quarter this year versus last year, whereas in U.K., if I look at the Retail side, it's just the opposite momentum? I mean your Workplace is still pretty strong. So can you just give a bit of dynamics what is playing out in the market on the net deposit side, both in U.K. and U.S. and any visibility you have for the rest of the year? So that would be very helpful. And similar thing, I would say, in the asset management as well, I mean, you had a pretty big outflow in asset management as well. So what's driving that would be good to know? Yes, thank you.

Lard Friese, CEO

Good morning, Ashik. Regarding asset management, the outflows we are experiencing are largely influenced by the current market sentiment and volatility, which is certainly not beneficial. We have observed a continuation of the trends seen in previous quarters, with the notable difference this quarter being the outflows from our joint venture in China, AIFMC, which is significant and reflects the subdued investor sentiment and lack of demand for new fund launches in that market. To address these challenges, we are focused on improving our margins by enhancing efficiency within our asset management division, particularly in the Global Platforms business. An example of this effort is our implementation of a new technology system, a project that began two years ago and is expected to be completed this year. Once finalized, this system will allow us to operate the platform more efficiently, thereby supporting margin improvement. Additionally, we are ensuring our asset managers concentrate on strategies where they have strong capabilities and can stand out, particularly in alternative fixed income, multi-asset fiduciary for retirement, responsible investment strategies, private debt, and real assets. This focus aligns with our recent acquisition of the NIBC CLO platform and our partnership with Lakemore in the U.S. In contrast, the situation in the U.S. and the U.K. shows different trends. The U.S. is experiencing solid sales momentum, with fewer withdrawals, especially in the retirement business. We've seen increases in written sales over several quarters, which create a stronger foundation for better flow profiles. Therefore, the current commercial performance in the U.S. should not be viewed in isolation; it's important to consider the growth we've experienced over the past year, particularly in life insurance and mid-market retirement sales, which have steadily improved. In the U.K., we observe a mixed landscape. Our Workplace Solutions business has not only seen growth this quarter but also recorded the best performance since 2018 in the previous quarter, indicating positive momentum. However, the retail platform still requires additional time for improvement. At Capital Markets Day, we acknowledged the need for further investments and technology enhancements to retain the preference of our users. While we are witnessing new customer journeys and improved performance, the volatile market environment is causing caution among retail investors, which affects the flow profile in the U.K. I hope this clarifies the situation.

Ashik Musaddi, Analyst

Yes okay. Thank you, thanks a lot.

Operator, Operator

Thank you. We will now take our last question for today and your last question comes from the line of Benoit Petrarque from Kepler. Please go ahead.

Benoit Petrarque, Analyst

Yes, good morning. So my questions are the following. So the first 1 will be on dividend upstream for 2023 and free cash flow ultimately. I think you've guided for free cash flow of roughly €600 million for 2023, putting the total remittance at around €900 million for 2023. I was wondering, we are mid-2023 now. How do you see this free cash flow/remittance figure for the year? And also for the U.S., I think you had €500 million, €600 million in mind for the full year. I saw that you reserved some dividends at holding level in the U.S. So are you still in line with what you had in mind earlier this year? Second one will be on the Dutch Solvency II ratio 191%, weaker than expected. I was wondering if you've seen more positive trends in the second quarter, thinking about also on the market side? And could you detail also the market movements for the Netherlands in the first quarter in the different parts? And then the final one would just be on the fixed annuity business. We've seen rates are kind of stabilizing at much higher levels in the U.S. Do you think this business is more attractive also looking at internal rate of returns on these products? Thank you.

Lard Friese, CEO

Matt, it might be good for you to handle the first two questions. I'll start with the fixed annuity business. That's correct that higher rates create a better environment for fixed indexed annuities. However, we have a specific strategy and are concentrating on the product lines we’ve selected. We're beginning to see some positive developments in the U.S. in life insurance and retirement, which is where our focus is. It's essential to maintain this focus. Generally, I agree that fixed annuities can be more appealing in a higher rate environment, but we're concentrating on our current product lines. Matt, over to you.

Matt Rider, CFO

On the dividend upstream point, we’re maintaining our guidance. We’ve indicated around €600 million in free cash flow for the full year. The remittance we received from AIFMC, our asset management joint venture, boosts our confidence in meeting or surpassing that €600 million target. However, we are not altering our guidance at this time. Regarding the Dutch Solvency II ratio, there was a decline during the quarter. At the end of the last quarter, it was at 205%, and this quarter it reported 191%. The decline is due to model and assumption updates related to correlation coefficients that were revised. This is a standard business update, and we expect it to improve as the business continues. There was also an impact from being slightly over-hedged at the end of the first quarter, which required additional capital and accounted for about five percentage points of the drop in the solvency ratio. However, that situation has already corrected itself in the second quarter. Overall, while operating capital generation was impacted by remittances made by Aegon in the Netherlands and some minor market movements, that summarizes the situation effectively.

Operator, Operator

Thank you. We have received one further question. One moment please and your question comes from the line of Michele Ballatore from KBW. Please go ahead.

Michele Ballatore, Analyst

Yes, thank you for taking my question. So the first question, if we look at your banking bond portfolio, I mean, considering the current situation with regarding sentiment with regard to especially regional U.S. banks. I mean, what is your view? Are you happy with your current asset allocation with regard to this specific asset? And also if you can give some color in terms of any rating migration, what is the impact on capital? Thank you.

Lard Friese, CEO

Thank you, Michele so, Matt?

Matt Rider, CFO

Yes. Overall, we have about $4.8 billion in total banking exposure within our general account in the U.S. Approximately two-thirds of this amount is rated A or better. In terms of regional banks, our exposure is limited to around $230 million, and we have no exposure to Silicon Valley Bank, Signature Bank, or First Republic. Therefore, it's quite minimal. Regarding preferred shares or AT1 in our portfolio, that figure is quite low at $156 million. Overall, our banking-focused corporate funds are defensively positioned, and I believe there is no cause for concern. As for rating migration, we recently updated our disclosures to provide new guidance on the sensitivity of the U.S. RBC ratio in relation to rating exposure and credit defaults. Previously, these two factors were combined, but now they are separated. Essentially, a one in 10 shock means that 10% of the entire portfolio would be downgraded by one rating category. That's the best way to think about it. Defaults are more straightforward, but we are essentially talking about a one in 10 shock.

Michele Ballatore, Analyst

All right, thank you.

Operator, Operator

Thank you. We will now go to the next question and your next question comes from the line of David Barma from Bank of America. Please go ahead.

David Barma, Analyst

Yes, good morning. Thanks for the additional disclosure on the assets and real estate. Just to come back on real estate specifically. Can you just remind us what the treatment is for revaluations in the RBC framework and whether we should be expecting some of that later in the year? And then secondly, on sales and U.S. Individual Life, do you think you outperformed the market in the first quarter? And more generally, you talked about product competitiveness. What does that mean in practice? How do you - America's products differ? And how do you think that play to your advantage in Q1? Thank you.

Lard Friese, CEO

Yes, thank you, David. I'll address the growth aspect, while Matt will discuss the real estate treatment within the RBC framework. At this point, it’s premature to assess our performance compared to the market since it typically takes time for market data to be reflected in the industry. Therefore, I cannot provide specific insights on that, David. However, based on disclosures from other peers, we are performing quite well in the Individual Life sector. I want to highlight our goal to become a top 5 player in this area. We primarily offer straightforward final expense whole life, along with universal life. The strength of our sales profile isn't due to significant differences in our products or pricing, but rather stems from our distribution capabilities. For instance, WFG now has 67,000 licensed agents, an increase of 10,000 from last year. The productivity of our agency channel has risen, which is fundamentally driving our growth. Additionally, we have introduced the Indexed Universal Life product in the brokerage market, which allows us to maintain the growth we’re currently seeing by expanding into other channels with the same product. That’s the perspective you should take. Now, on the topic of real estate, Matt?

Matt Rider, CFO

Let me pick up the real estate one. So I think you're asking how is it reflected and how often do we revalue. So we revalue the real estate portfolio in the U.S. on a quarterly basis. And the way that, that is reflected in the statutory books for capital purposes is that it is carried at market value, but on the other side, there is a very high risk-based capital charge. So it works out that if there are fluctuations in the value, a lot of times to offset in the risk-based capital charge. So there's not really a lot of sensitivity to that in the RBC ratio itself.

David Barma, Analyst

And what was the movement in Q1?

Matt Rider, CFO

Negligible.

Operator, Operator

Thank you. I will now hand the call back to Jan Willem. Please go ahead.

Jan Weidema, Head of Investor Relations

Thank you, Sharon. This concludes today's Q&A session. On behalf of Lard and Matt, I want to thank you for the lively interaction. Should you have any remaining questions, please do get in touch with us at Investor Relations. We are here to help. Have a good day. Thank you for your participation in today's call.

Lard Friese, CEO

And see you in London.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.