Earnings Call Transcript
AEGON LTD. (AEG)
Earnings Call Transcript - AEG Q2 2023
Operator, Operator
Good day, and thank you for standing by. Welcome to the Aegon First Half 2023 Results Call. Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker, Hielke Hielkema, Investor Relations Officer. Please go ahead.
Hielke Hielkema, Investor Relations Officer
Thank you, operator, and good morning to everyone. Thank you for joining this conference call on Aegon's first half 2023 results. My name is Hielke Hielkema from Aegon Investor Relations team. With me today are Aegon's CEO, Lard Friese; and CFO, Matt Rider, who will take you through the highlights of the first half year, our financial results and the progress that we are making in the transformation of Aegon. After that, we will continue with a Q&A session. 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. And on that note, I will now give the floor to Lard.
Lard Friese, CEO
Thank you, Hielke, and good morning, everyone. We appreciate that you are joining us on today's call. Today, we present our results under the new IFRS 9 and 17 accounting standard for the first time. But first, let me run you through our strategic developments and commercial momentum. We have a lot to talk about. So let's move to Slide #2 for the achievements in the first half of 2023. We have started the next chapter in Aegon's transformation delivering a successful Capital Markets Day in London in June. We closed the transaction with a.s.r. in July and have started the €1.5 billion share buyback program associated with the deal, which we expect to complete before the end of June 2024. In addition, we still intend to reduce our leverage by up to €700 million in the same time frame, and we'll update you on that when appropriate. On the strategy front, we continue to take steps to transform our business. We have increased our financial stake in our Brazilian joint venture, expanded our partnership with Nationwide Building Society in the U.K. and extended our asset management partnership with La Banque Postale in France. The sale of our remaining Central and Eastern European businesses have been closed, and we have announced the sale of our stake in our joint venture in India. We are now fully focused on 3 core markets, 3 growth markets and 1 global asset manager. We're also delivering on our commitments to continue to reduce our exposure to U.S. Financial Assets and to improve the level and predictability of capital generation. Transamerica has been able to execute an additional reinsurance transaction, encompassing 14,000 Universal Life policies with secondary guarantees. This will free up approximately $225 million of capital, which will be used for management actions to further reduce our exposure to Financial Assets over time. It also significantly improves our risk profile; together with the prior similar reinsurance transaction, the total of 25% of the statutory reserves backing these policies have now been reinsured. Turning to our results over the first half of 2023. The operating results now reported under the new accounting standards, IFRS 9 and 17, increased by 3% compared with the first half of 2022. This was driven by increases in the U.S., the U.K. and the International segment, which more than offset a decreasing operating result in Asset Management. Operating capital generation before holding, funding and operating expenses increased by 13% compared with the first half of 2022, reflecting business growth in our U.S. Strategic Assets, together with improved claims experience. Turning to our commercial results. Transamerica performed well. We delivered strong sales growth in all of our U.S. Strategic Assets. The U.K. Workplace Solutions platform continued to deliver strong growth, and sales increased in our partnerships in China and Brazil. The results of our Asset Manager and our U.K. Retail business continued to be negatively affected by adverse market conditions. Recently, we have announced our intention to move Aegon's legal seat to Bermuda. Subsequently, the Bermuda Monetary Authority will then assume the role of group supervisor. Today, we have convened 2 extraordinary general meetings to be held at the end of September to seek shareholder approval for the move. Finally, on our path to increase the dividend to around €0.40 per share over the year 2025, we have increased the 2023 interim dividend to €0.14 per share, up more than 25% compared to the 2022 interim dividend. This is testament to our strong financial position and prospects. Before I move on to the results, I want to recap the priorities we presented at the recent Capital Markets Day in London on Slide #3. We have defined 4 key priorities to create value for our shareholders during the second chapter of Aegon's transformation. The first of the near-term priorities we announced in June has already been achieved. We have closed the transaction with a.s.r., and we now own a nearly 30% strategic stake in the Dutch market leader. Moving our legal seat to Bermuda is the next step ahead of us on our journey to transform the group, and we are on track to accomplish this. We presented our plans to increase Transamerica's value and to capture the opportunities in the U.S. middle market. Our ambition is to build America's leading middle market life insurance and retirement company. Over the coming 3 years, we will increase both the level and the quality of capital generation from Strategic Assets while reducing our exposure to Financial Assets. At the same time, we will continue to strengthen the U.K. and Asset Management businesses, and we will invest in growing the joint ventures we have in International and Asset Management. The final priority announced at our Capital Markets Day relates to our capital management. We will continue to be rational and disciplined allocators of capital looking to utilize our significant financial flexibility at the holding to create value for our shareholders. With the strategic priorities clearly set, let's move on to our commercial momentum in the first half of 2023, starting on Slide #4. I would like to start with the progress made by World Financial Group or WFG, our vast life insurance distribution network, one of the two focus areas in our U.S. Individual Solutions business. Our ambition is to increase the number of WFG agents to 110,000 by 2027, but at the same time, improving agent productivity. Momentum remains strong with a number of licensed agents having grown to 70,000 by the end of June, an increase of 20% compared with a year earlier. In addition to extending WFG's distribution reach, we are taking actions to improve the productivity of the agency sales force. The number of multi-ticket agents, these are agents selling more than 1 life policy over the last 12 months, has increased by 12% compared with the year earlier. Transamerica's market share of life insurance products sold by WFG in the U.S. remains high. This is due to the improvements we have made to the service experience for WFG agents, combined with the continued competitiveness of Transamerica's products in this distribution channel. Slide #5 addresses the second focus area of our U.S. Individual Solutions business. We are investing in both product manufacturing capabilities and the operating model in order to position the Individual Life insurance business for further growth through WFG and third-party users. As you can see, commercial momentum remained strong in the first half of the new year. New Life sales increased by 17% compared with the first half of last year, largely driven by higher Indexed Universal Life sales within WFG. In the first half of 2023, New Business Strain increased by 12% compared with the first half of 2022. The Earnings On In-force increased 35%, reflecting the strong growth of this portfolio. So let's move to Slide #6, where we show the progress made in the U.S. Workplace Solutions retirement plans business. Transamerica aims to increase Earnings On In-force from its Retirement business by leveraging its capabilities as a record keeper with the ambition to materially increase the penetration of the ancillary products and services it offers. Sales momentum remained strong in the first half of 2023. Net deposits for midsized plans increased 32% over the same period last year, benefiting from both strong written sales in previous periods and lower withdrawals. We also saw good growth in our General Account Stable Value products as well as Individual Retirement Accounts, in line with our strategy to grow and diversify our revenue streams with the Workplace Solutions segment. In the first half of 2023, the Earnings on in-force of our Strategic Assets in the Retirement Plans business were USD 45 million, which was an increase of 20%, mainly from the General Account Stable Value product. Let's move to Slide #7, the United Kingdom. In the first half of 2023, net deposits in the Workplace channel amounted to a record high of GBP 1.5 billion, an increase of 36% compared with the first half of last year. Sales momentum in the Workplace remains strong. In the Retail channel, on the other hand, commercial results were weak. The macroeconomic environment continued to negatively impact investor sentiment across the industry. As a result, net outflows amounted to GBP 1.1 billion in the first half of 2023, more than in the same period of 2022. Annualized revenues lost on net deposits amounted to GBP 6 million for the quarter. This was predominantly due to the gradual runoff of the traditional product portfolio, which was partially offset by revenues gained on net deposits in the Workplace channel. I'm now turning to Slide #8 to comment on the challenging performance of our Asset Management business. Market conditions remain challenging, which led to third-party net outflows in both Global Platform and Strategic Partnership segments. Combined with adverse market movements and unfavorable currency movements, Assets Under Management declined by 7% compared with the end of June 2022. Encouragingly, we saw improvements in third-party net deposits towards the end of this half year. Operating capital generation declined compared with the first half of 2022. This was driven by lower net deposits and unfavorable market movements despite lower expenses. Let's move on to our growth markets on Slide #9, where we continue to see steady progress. New Life sales in our growth markets increased by 45% compared with the first half of 2022. This was largely driven by our business in China following the relaxation of the country's COVID-19 measures. We also recorded good growth in Brazil. Non-life premium production in Spain and Portugal rose 6% as weaker demand for Property and Casualty Solutions was more than offset by growth in Accident and Health insurance. Operating capital generation of the International segment, excluding TOB, increased by 27% as a result of new business growth. On Slide #10, you'll see that we maintain a high pace on the transformation of Aegon and sharpening of our strategic focus. The transaction with a.s.r. has been closed and disentanglement solutions are in place. As the new combination moves forward, we expect a significant synergy to be realized from which our shareholders will benefit. Aegon U.K. has extended their partnership with Nationwide Building Society and will onboard Nationwide's advisory business early next year. This supports Aegon's U.K. strategy to be the leading digital platform provider in the workplace and retail markets and to drive forward our pension and investment propositions. Aegon Asset Management and La Banque Postale have expanded their partnership in the asset manager La Banque Postale Asset Management through 2035. We have also participated in the capital raising to fund La Banque Postale Asset Management's acquisition of La Financière de l'Echiquier, a French asset manager. The acquisition will consolidate La Banque Postale Asset Management's strong market position. In Brazil, we have increased our economic ownership stake in the life insurance joint venture, Mongeral Aegon Group from 54% to 59%. This puts us in a stronger position to benefit from the growth in that market. We also took significant steps in our strategy to exit subscale or niche positions. We have closed the sale of our remaining Central and Eastern European businesses, first announced in 2020, and have announced the sale of our stake in the India business. The final topic I want to address on Slide #11, is the intended transfer of our legal seat to Bermuda. Bermuda Monetary Authority is to assume the role as our group supervisor after this. Given the importance of this topic, I want to address the rationale behind this development. Following the closure of the transaction with a.s.r., Aegon no longer has a regulated insurance business in the Netherlands. And under EU Solvency II rules, Dutch Central Bank can no longer remain a group supervisor and a new group supervisor is required. Various options were explored. Some options were, however, not feasible for various reasons. For instance, in some jurisdictions, there is no meaningful business presence. In others, the financial reporting requirements do not align with our accounting framework or prevailing regulatory uncertainty would not provide a stable basis for the execution of our global strategy. After consulting the members of the college of supervisors, which consists of the different supervisors regulating our local entities, the BMA informed us that it would become Aegon's group supervisor if we were to transfer our legal seat to Bermuda. Transferring the legal seat to Bermuda and being regulated at the group level by the BMA is consistent with our strategy outlined at the recent Capital Markets Day. Bermuda has an established, well-regarded regulatory regime and has experience in regulating insurance groups and companies with an international presence. The regulatory regime has been granted equivalency status by both the EU and the U.K. and has been designated as a qualified and reciprocal jurisdiction by the U.S. National Association of Insurance Commissioners. The transfer of the legal seat to Bermuda allows Aegon to maintain its headquarters in The Netherlands, where we have the experience and the talent to manage this international company. It also allows us to maintain our listings on Euronext Amsterdam and the New York Stock Exchange, bringing stability to our shareholders and to remain a Dutch tax resident. On Slide #12, this addresses the governance consequences of the intended transfer of our legal domicile. Following the transfer to Bermuda, Aegon N.V. will become Aegon Limited, a Bermudian company. This means that the basis of Aegon's bylaws will be established on Bermudian law and governance practices. At the same time, we remain committed to applying well-recognized international governance standards. Aegon will preserve its current governance principles to the extent possible and practical in view of the redomiciliation and where appropriate to the context of Aegon's international footprint. This includes Aegon's commitment to take into account the long-term interest of the company and all its stakeholders. We conducted an extensive engagement process with our shareholders and other stakeholders following the initial announcement in June. We have listened carefully to the feedback we received and made a couple of changes to the proposed bylaws on the basis of that dialogue. Aside from the other voluntary commitments through strict governance, we had already announced, we have added further binding rights for shareholders in terms of approval of major transactions and on the Board's remuneration policy. These changes and all other relevant information have been published on our corporate website today as part of the complication documents for the Extraordinary General Meetings during which investor approval for the transfer of the legal seat will be requested. I now hand over to Matt for the results of the first half of 2023.
Matthew Rider, CFO
Thank you, Lard, and good morning, everyone. Today, we are reporting our results under the new IFRS 17 and 9 accounting framework for the first time. It's been a huge endeavor over the past years to prepare for this shift. So I wanted to start off by thanking the many colleagues who are involved in this process. As you can see, we've provided a lot of new disclosures, and it will likely take you some time to digest it and get comfortable with the new standard. Implementing the new framework also in the context of the a.s.r. transaction has met some changes to our processes. For example, we're reporting a week later than we did last year and now half yearly. Beginning with our full year 2023 results disclosure, our financial reporting calendar will move even later to accommodate bringing in the results of a 30% shareholding in a.s.r. on an IFRS 17 basis. We also will move our expense assumption review process to the fourth quarter for all business units in order to leverage our budgeting process. At this moment, we are not publishing IFRS 17-based sensitivities, but we will do so by the time we publish our 2023 annual accounts. So with that, I want to walk you through the overview of our financial results starting on Slide 14. The operating result increased by 3% compared with the first half of 2022. Increases in the U.S., the U.K. and the International segments were partially offset by a decrease in Asset Management. Operating capital generation before holding, funding and operating expenses increased by 13% compared with the first half of 2022. This was driven by the U.S. and reflects business growth of Strategic Assets and improved claims experience. Free cash flow in the first half of 2023 amounted to €287 million and mainly reflects remittances from the U.S., the U.K. and Aegon's asset management joint venture in China in the first quarter. Cash capital at the holding decreased to €1.3 billion at the end of June 2023 as planned, as remittances from the units were primarily offset by capital returns to shareholders. Our gross financial leverage was stable at €5.6 billion. The group Solvency II ratio decreased by 6 percentage points since year-end 2022 to 202% due to a number of items, including the deduction of the interim dividend, a reduction of eligible owned funds due to tiering restrictions, previously disclosed one-time items and unfavorable market movements. The latter notably includes the impact of lower real estate valuations in The Netherlands. Nevertheless, our capital position remains strong and the capital ratios of our main units remain above their respective operating levels. Let's move on to the operating result on Slide 15. The group's operating result was €818 million, which is an increase of 3% compared to the prior year period. The operating result for the U.S. increased by 4% in the first half of 2023 or 3% in local currency terms. This increase was driven by an improvement in mortality claims experience, but largely offset by a decrease in the net investment result, partly from higher interest expense on short-term variable rate borrowings. The noninsurance operating result benefited from growth in both Retirement Plan and WFG. Over the same period, the operating result from the United Kingdom increased by 24% in local currency. This was driven by an improvement of the net investment result as a result of favorable market movements, which more than offset the impact of the planned transfer of the protection business to Royal London. In our International segment, the operating result increased by 9%, predominantly due to our growing businesses in Spain and Portugal and Brazil. Finally, the operating result from Aegon Asset Management decreased by 34% in constant currency terms compared with the same period of 2022. The decrease was driven by lower management fees in both global platforms and strategic partnerships and despite a lower operating expense, which included reduced variable remuneration accruals. Slide 16 shows the net result over the first half year of 2023. Nonoperating items totaled a loss of €180 million, driven in equal parts by realized losses on investments and net impairments. Realized losses on investments were primarily recorded in the U.S. and stemmed from the sale of bonds in the context of the reinsurance, a part of this SGUL portfolio, as well as to facilitate a reduction of short-term borrowings. Net impairments were driven by an increase of the expected credit loss balance in the U.S. due to an update of economic forecasts. Other charges amounted to €870 million. In the U.S., other charges amounted to €574 million. These were driven by investments in the Life operating model and the restructuring of an earn-out agreement with the founding WFG agents. It also included the impact of model and assumption updates in the U.S. These impacts were in line with what we had indicated at the recent Capital Markets Day. Other charges also included a €110 million charge related to the first half of 2023 results of Aegon The Netherlands, which was driven by an impairment as a result of the reclassification of these activities as held for sale. Another €110 million charge relates to a book loss on the remaining activities in Central and Eastern Europe following the completion of their disposal. I will now turn to Slide 17 to address the development of Aegon's Contractual Service Margin, or CSM, in the first half of the year 2023. New business CSM creation amounted to €0.2 billion, mainly driven by growth of the Individual Life portfolio in the U.S., partly offset by the reinsurance of the U.K. protection book. The CSM release of €0.5 billion was mainly driven by the runoff of the Financial Assets in the U.S. and of the traditional book in the U.K. Negative claims and policyholder experience variance was driven by unfavorable experience in Individual Life and unfavorable lapse and utilization experience in variable annuities, both in the U.S. The main driver for the decrease of the CSM in the U.S. was the impact from assumption changes in the Americas, as was previously announced. This includes the removal of the morbidity improvement assumption and an increase in inflation assumptions in Long-Term Care, partly offset by the benefit of the expected premium rate increase program. At the end of the first half of the year 2023, the CSM stood at €8.3 billion. Let me now turn our view on capital on Slide 18. Operating capital generation before holding, funding, and operating expenses increased by 13% compared with the first half of 2022. Earnings on In-force before holding expenses increased by 26% compared with the prior year period. This was driven by Transamerica and reflects improved claims experience 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 growth in the U.S. This is in line with our ambition to drive profitable growth in our U.S. Strategic Assets. The release of required capital was broadly stable compared with the first half of 2022. In conclusion, we remain well on track to meet our guidance of at least €1 billion operating capital generation from the units in 2023. On Slide 19, I want to walk you through the development of the capital ratios of our main operating units. Compared with year-end 2022, the U.S. RBC ratio increased slightly to 427% above the operating level of 400%. Operating capital generation contributed favorably to the ratio, more than offsetting remittances to the holding. Market movements had a marginally positive impact with benefits from favorable equity markets being largely offset by fund basis risk. Onetime items had a negative impact. These were driven by the investments made in Strategic Assets and the annual model and assumption updates, which reduced the RBC ratio by 13 percentage points. We guided at the Capital Markets Day for a negative impact of in total around 20 percentage points on U.S. RBC ratio. We, therefore, expect to reflect the remaining negative impact of around 7 percentage points in the RBC ratio in the second half of this year. The impact of credit impairments and rating migrations on the RBC ratio remained negligible in the first half of the year. The solvency ratio of Scottish Equitable, our main legal entity in the U.K. decreased by 3 percentage points to 166%. This reflects the negative impact from market movements and remittance to the U.K. intermediate holding. This remittance was subsequently used in part to fund the acquisition of Nationwide's advisory business. Let me now turn the page for an update on our Financial Assets on Slide 20. Here, we summarize the continued value creation from our Financial Assets. In July, we reinsured 14,000 Universal Life policies with secondary guarantees, also known as SGUL policies, through a reinsurance transaction, reducing exposure to mortality risk. This has freed up $225 million of capital, which we will use to further reduce our exposure to Financial Assets, in line with our plan to expedite the runoff of these exposures. The benefit of the reinsurance will be recognized in 3Q 2023. Together with the prior reinsurance transaction undertaken, a total of 25% of the statutory reserves backing the SGUL portfolio has now been reinsured. In Long-Term Care, our primary management actions are rate increase programs. Since the start of the year, we have obtained regulatory approvals for additional rate increases worth USD 86 million. This represents 12% of the new target of $700 million worth of premium rate increases that we had announced at the Capital Markets Day. We will continue to work with state regulators to get pending and future actuarially justified rate increases approved. In the first half of 2023, we extended our track record of successfully hedging the targeted risks embedded in our variable annuity guarantees, achieving 98% hedge effectiveness. The capital employed in our Financial Assets was stable compared to the end of 2022 at $4.1 billion. During the first half of 2023, releases were realized on the Universal Life and fixed annuity blocks. These were offset by increases in required capital on variable annuities and the higher allocation of alternative assets to the LTC block. On Slide 21, you can see that cash capital at the Holding decreased to €1.3 billion during the period, which is still in the upper half of the operating range. Free cash flow for the period was in part offset by the impacts of the divestitures and acquisitions Lard talked about earlier. Cash outflows in the first half of 2023 were mostly related to capital returns to shareholders. We completed the €200 million share buyback program and returned a further €232 million to shareholders through the 2022 final dividend. Let me now turn the page for my concluding slide. In summary, we continue to deliver on our plans, and the results over the first half of 2023 show that we continue to make good progress and that we are on track to achieve our 2025 financial targets. And with that final note, I now pass it back to you, Lars, for your concluding remarks.
Lard Friese, CEO
Thank you, Matt. Let me summarize today's presentation with the final Slide #24. Aegon has entered the next chapter of its transformation from a position of strength. We have concrete ambitions and plans to move forward with our strategy as we presented at the Capital Markets Day in June. Operating capital generation growth was strong in the first half of 2023. Commercial momentum remained strong in our U.S. Strategic Assets, in our U.K. Workplace activities and in our International growth markets. More work needs to be done on Asset Management and our U.K. Retail business. We will address our ambitions here with you in 2024. The next important milestone will be the Extraordinary General Meetings in September to receive shareholder approval for the transfer of our legal seat to Bermuda. We are convinced that the proposed move is in the interest of shareholders and will provide stability for the group to continue to execute upon its announced strategy. If you have any questions on this process, we have published detailed documents on our corporate website. Feel free to reach out to the IR team if any questions remain. I want to be clear that the redomiciliation process will not distract us from what is most important: accelerating the execution of our strategy, driving growth, and creating value by reallocating capital from Financial Assets to Strategic Assets. Let me conclude by reiterating my confidence that we will deliver on our strategic commitments and financial targets. We are committed to becoming a leader in investment, protection, and retirement solutions, and we have a clearly articulated strategy to achieve this. I would now like to open the call for your questions. Operator, please open the Q&A session.
Operator, Operator
Thank you. We will now go to our first question. And your first question comes from the line of Andrew Baker from Citi.
Andrew Baker, Analyst
So the first one is on the OCG. Are you just able to provide moving pieces on the OCG versus the previous €270 million quarterly guidance and what we see the normalized run rate going forward? And I guess within this, can you just talk a little bit about the New Business Strain because my understanding from CMD was that this was expected to grow over time? It looks like 2Q specifically, it declined €20 million or so. So how should we be thinking about this going forward? And then secondly, just on the CSM growth. I look at the new business and interest accretion; this looks lower than the CSM release in the first half. So I appreciate some of this is driven by mix between Strategic and Financial Assets. So just wondering if you are able to provide a sense of the sort of normalized CSM growth expectations for the Strategic Assets versus the Financial Assets going forward? I'm just really trying to get a better picture of how you're positioning the growth story against sort of the CSM that's declining from the Financial Assets drag going forward?
Lard Friese, CEO
Thank you much, Andrew. Matt, over to you.
Matthew Rider, CFO
Thank you for your questions, Andrew. I'll address the OCG topic first. To summarize, the guidance we provided for the last quarter remains around €270 million OCG per quarter, and I can break down the details. In the second quarter, we reported €328 million of operating capital generation, which included very favorable claims experience amounting to €35 million, primarily from U.S. mortality claims. We also experienced a lower New Business Strain of about €10 million, which I'll elaborate on shortly, and about €10 million of favorable underwriting variances in the U.K. Therefore, if you calculate, the clean run rate for the quarter comes to €273 million, aligning closely with the guidance we indicated for the first quarter. Regarding your second question, you've noted the reduction in the New Business Strain, which is stemming from the Retirement Plans business. We are still witnessing growth in New Business Strain from life insurance, which is positive as we are issuing profitable new business there. In the Retirement Plans business, we had a significant net deposit number in the first quarter, which decreased in the second quarter, leading to capital being held against that. That's the reason for the lower New Business Strain. Concerning the CSM interaction, at the group level, we added a CSM for new business of about €194 million but had a corresponding CSM release of €483 million. This indicates that the new business CSM we are generating is less than the release from the in-force block. A significant factor is that most of our CSM is linked to Financial Assets, which are in a closed block that will run off over time. For context, in the U.S., we have over €7.1 billion of CSM, with 72% attributed to Financial Assets, and the rest to Strategic Assets. In the second half of the year, over 80% of the CSM release is driven by the Financial Assets portfolio, which will decrease over time. Importantly, as we generate earnings, we expect to see growth from businesses not accounted for under IFRS 17. This includes growth in WFG and U.K. platform sales, which since 2020 are not recognized as insurance contracts or are related to asset management and retirement plans in the U.S., excluding Stable Value funds. Thus, as the insurance results decline, you will notice an increase in non-insurance results. This reflects what we discussed at the Capital Markets Day regarding the Earnings On In-force development over time.
Operator, Operator
We will now go to the next question. And your next question comes from the line of Michael Huttner from Berenberg.
Michael Huttner, Analyst
I wanted to ask about the U.S. claims experience. Can you provide insights on the mortality rates in Long-Term Care? You mentioned that you don’t expect the mortality to stay this robust, so I was hoping for more detail on that. The current numbers look good, but I understand things are going to change. Additionally, could you elaborate on the Universal Life buyout program? I recall it being initiated around the time of the Capital Markets Day, and I was quite interested since similar programs were done in the variable annuities segment. Is the program complete now, and is there more that can be done? I’m looking for further details on this.
Lard Friese, CEO
Thank you very much, Michael. This is Lard. Just to clarify your second piece, is this also pertaining to what we disclosed today about the reinsurance transaction, the with secondary guarantees?
Michael Huttner, Analyst
Yes, please.
Lard Friese, CEO
Okay. So thank you very much. So on both questions, Matt, can I hand over to you?
Matthew Rider, CFO
Thanks, Michael. Regarding mortality, we need to look at it differently in terms of operating capital generation versus IFRS results. It's simplest to explain it from the operating capital generation perspective. Compared to our long-term expectations, we had about €34 million in improved claims experience on the mortality side and €1 million on the morbidity side. Most of our good claims experience is reflected in the mortality results. It's important to note that under IFRS 17, the way we report mortality experience has changed. We essentially calculate the cash difference between our actual and expected mortality based on our long-term management estimates. In the first half of 2023, this was about €30 million worse than our long-term estimates, which isn't significant considering the overall size of the book. I should mention that we made several assumption updates in the first half of the year, which may have impacted our expectations negatively. Consequently, the experience variance number should decrease following these updates. If you'd like more details, you can reach out to our colleagues in Investor Relations for a tutorial on this process. Regarding your second question, it seems you are referring to the buyout of institutionally-owned contracts, not the SGUL. We have continued our buyout program, which we started at the beginning of last year and have expanded. Currently, we've removed about 15% of the face value associated with these policies owned by institutional investors. We typically achieve an investment return greater than 10%, which we set as our pricing target and monitor closely. Moving forward, we plan to continue this approach cautiously to ensure we meet our pricing objectives. As mentioned in my opening remarks, some of the capital released from the SGUL reinsurance deal will be used to reduce these financial assets further, including the institutionally-owned SGUL contracts.
Michael Huttner, Analyst
And you can say a little about the SGUL as well?
Matthew Rider, CFO
Yes, I can talk about the SGUL deal. So, I mean just let's frame it a little bit. So what we're talking about here is reinsurance of 14,000 policies representing about €1.4 billion of reserves. And I think as Lard has said in his opening remarks, that represents about 25%. So all the SGUL reinsurance we've done to date represents about 25% of the U.S. statutory reserves related to the block. Just to put it in perspective, it's also about 30% of the net amount of risk. So think of it as the face amount. So this transaction generates €225 million of capital and it's basically going to reduce the RBC required capital by about €50 million. Now importantly, it's also going to improve operating capital generation going forward because this block had a drag as the contracts get older and reserves increased, there was an OCG drag. So we'll get to see a benefit of about $25 million per year. But I got to tell you, that's all embedded in the Capital Markets Day expectations. We had baked all that in, but I just want to give you a framing for what that SGUL reinsurance deal does for us.
Operator, Operator
We will now go to our next question. And your next question comes from the line of David Barma, Bank of America.
David Barma, Analyst
Just to come back on what you just said about the OCG benefits from the reinsurance deal that you've announced today. So is that part of the €0.1 billion of additional OCG that you flagged at the CMD?
Matthew Rider, CFO
Yes, it is. Yes.
David Barma, Analyst
It is, okay. Okay. And then secondly, on the U.K., can you please talk a bit about the rationale for your recent extended partnership with Nationwide? And should we see this more as a retention tool for your existing book? Or is it part of a bigger strategy to increase advice, I take on U.K.?
Lard Friese, CEO
Thank you, David. We are very pleased with the extension of our partnership with Nationwide Building Society. As Matt mentioned, our longstanding collaboration with Nationwide dates back to 2016, during which we've been serving their customers. We provide access to our products through Nationwide's in-house financial planning service. This extended strategic partnership will ensure that we remain the preferred provider for Nationwide's customers, particularly regarding ISAs and the general investment account. We are also transferring the advisory teams from Nationwide to our side, which enhances the strengths of both partners. This move solidifies and prolongs our partnership, and we are very happy to have achieved this.
Operator, Operator
And your next question comes from the line of Farquhar Murray from Autonomous.
Farquhar Murray, Analyst
Just 2 questions, if I may. Firstly, on the CSM roll forward on Slide 17. Please, could you just elaborate on the policyholder experience in the VA book. You mentioned lapse and utilization. But I just wonder if you can give us a little bit more color on which products are driving that in a sense of what's behind it and how it might develop? And then secondly, momentum in WFG looks solid in terms of licensed agents, but the multi-ticket one is slightly lagging that improvement. Can I just ask how long it is taking for a typically newly licensed agent to follow through into a multi-ticket one? And what kind of initiatives can you do to encourage conversion there?
Lard Friese, CEO
Farquhar, I'll address your WFG question, and Matt will discuss the CSM roll forward. Regarding WFG, we aim to grow our agents to the target of 110,000 by 2027, and we're making good progress towards that goal. You may have noticed a significant year-on-year increase in this area. We also want to enhance the overall number of tickets and agent productivity. The timeline for moving from a single ticket agent to multiple ticket agent varies, and I will need to get back to you with an exact timeframe. However, it requires a focused strategy to ensure that agents become increasingly productive over time. We have observed improvements in productivity, are actively measuring it, and will continue to report on our progress. You can expect to see continued advancements in the near future. Regarding the CSM?
Matthew Rider, CFO
Yes. I'm looking at Slide 17, which shows a decrease of €163 million in the CSM balance, along with the CSM development on the right. This is primarily related to variable annuities, with poor surrender and benefit utilization experiences. On the Life side, there are mixed outcomes in terms of persistency and mortality. It's important for everyone to understand the geography of these issues. For instance, on the variable annuity side, the experienced variances affecting the CSM concern contracts with CSM, specifically those involving withdrawal benefits that have historically been written. This is different from the IB and DB business, which does not include a CSM, so you see those experience variances reflected in the P&L instead of the CSM. If you reach out to Investor Relations, we can provide you with more detailed information on that.
Operator, Operator
We will now go to the next question. And your next question comes from the line of Iain Pearce from Exane.
Iain Pearce, Analyst
Just a couple on the CSM. Firstly, thinking about the CSM walk, I'm guessing you expect that the size of the decline on a normalized basis to be slowing. The expectation is that new business will be growing in its contribution towards CSM and the release of the CSM to shrink as the 80% in runoff declines. I'm just wondering on the sort of time frame of how long you expect that CSM to be declining for and if you expect a gradual switch over of new business becoming bigger than the runoff of the CSM? And if there's any sort time frame for what that might look like? And then the second one was just on the assumption changes that are made in CSM, flagging some deteriorating assumptions in Long-Term Care. Just wondering if this means that sort of profitability has declined in the Long-Term Care business? So I guess that would be quite surprising given the sort of rate increases that you've been putting through there and the sort of favorable morbidity experience that you've been having recently. So just those 2 questions, please.
Lard Friese, CEO
Yes. Thank you, Iain. So, Matt, over to you.
Matthew Rider, CFO
Yes, it's challenging to provide a precise timeline for when the new business added in CSM will coincide with the release of the CSM. However, it's clear that this will not happen in the short or medium term. When considering the CSM release, you should factor in that we anticipate releasing between 8% to 12% of the initial CSM balance each year. I understand this may not be a complete answer right now, but we will update you later. Regarding the changes in assumptions for Long-Term Care, we need to clarify what is taking place. As you noted, in the CSM roll forward, there is a significant reduction in CSM due to the removal of the morbidity improvement assumption, which has been countered only partially by the increase in CSM from the premium rate increase program we are implementing. When it comes to profitability, it's important to highlight that had we not removed the morbidity improvement assumption, we would have observed a negative impact on the experience line for that block if morbidity improvement did not materialize. While we have experienced positive outcomes in the past and expect that trend to continue, the removal of this assumption means that if morbidity improvement does occur, it will positively influence our experience adjustments moving forward. Additionally, while these two elements are somewhat disconnected, it’s important to note that we consistently conduct actuarially justified premium rate increases, and part of this justification comes from our adjustments to the assumptions regarding morbidity improvement and inflation. Consequently, we expect our experience results to trend positively rather than face future negative impacts, if that makes sense.
Operator, Operator
We will now go to the next question. And your next question comes from the line of Nasib Ahmed from UBS.
Nasib Ahmed, Analyst
The first one on ULSG, generally. So you clearly have a drag. You've got €25 million on the block that you've reinsured. Is there anything you can do on the assumptions there similar to down on the Long-Term Care morbidity on persistency or mortality to make sure that, that drag is zero and take a hit on the stock of RBC ratio? That's the question one. And the second one is on the capital release from the reinsurance transaction. That's only €50 million of the €4.1 billion. I think you mentioned a few actions at the CMD that you could take to unlock further up to €4.1 billion. Are there any more actions that you're considering anything to update on versus the CMD?
Lard Friese, CEO
So, Matt?
Matthew Rider, CFO
Yes. So the short answer is that there are additional management actions that we can do, either unilateral or bilateral actions as we said at the CMD. We also consider the potential for additional third-party transactions, but we're not going to comment on those at this moment in time. One of the questions that we sometimes get is we've now got approximately 25% of the statutory reserves that have been part of reinsurance deals in the past. The question is, well, why don't you do another one? Well, we can do those. But we try to attack the blocks bit by bit. Every cohort, every issue year can be slightly different in terms of the character. So we were going to whittle away at this over time. I would not expect 1 giant reinsurance transaction. We've been successful in the past, and we expect to do that going forward to attack these blocks one bit at a time. But this last SGUL reinsurance deal was a very, very good one for us.
Operator, Operator
We will now go to the next question. And your next question comes from the line of Ashik Musaddi from Morgan Stanley.
Ashik Musaddi, Analyst
I have a few questions. First, could you provide some clarity on the reinsurance transaction? How should we interpret the €225 million ERU? Is this similar to a €50 million capital release multiplied by four, indicating that it's freeing up own funds for use? Or does the €50 million represent own funds released due to the SCR reduction, with an additional €200 million generated on top of that? My second question pertains to the U.S. holding company, which experienced a 20% drag in the first quarter due to the transition from RBC calibration to holding company calibration, and now that has increased to 28%. What accounts for that additional 8%, and how should we view it? Does it have capital implications, or is it something we can overlook? Do we need to replenish that amount if it has been utilized? My third question concerns the CSM. Should we be concerned about the CSM, especially since your CSM balance decreased by 10% in the first half of the year? If we consider an 8% to 12% release of CSM, a 10% reduction would mean CSM releases, which affect earnings, could decline by 10% annually for many years ahead. While this could be mitigated by your non-insurance businesses, WFG and Retirement, they likely won't offset the decline in CSM fully. Should we be worried about the CSM and the various negative one-off items? Are there expectations for more of these as you continue to restructure the portfolio?
Lard Friese, CEO
No, that's okay. So these were your questions, Ashik. Then I hand over to Matt.
Matthew Rider, CFO
Let's first break down the reinsurance transaction, specifically the €225 million. Essentially, on a U.S. statutory basis, we recorded a gain from the transaction amounting to about €355 million. However, in order to transfer assets to the reinsurer, we incurred losses on bonds totaling approximately €180 million. The remaining item is the release of the required capital of €50 million. I hope that clarifies your question. Regarding the U.S. holding company, you noted that there are some discrepancies in converting our RBC ratio to the group Solvency II ratio, which stem from activities in the holding company rather than the regulated entities. One significant factor is the restructuring of an earn-out agreement with one of our founding agents, which impacts the holding company without appearing in the RBC ratio. Additionally, there was an impairment related to a software asset connected to the integration of the TCS business, and we contributed to the employee pension scheme, all of which contribute to about a 3 percentage point difference. Another point I mentioned earlier involves tiering limits on Solvency II reporting, specifically concerning deferred tax assets at the group level because we have higher DTAs in the U.S. The recent transaction with a.s.r. included a tax settlement that reduced deferred tax liabilities, affecting our offset and resulting in a discrepancy in the Solvency II ratio. Finally, we completed a deal with La Banque Postale after the quarter ended, which has capital implications around 2%. In general, you should pay attention to the U.S. holding company. We expect it to return to normal by the year's end as we address timing issues related to the WFG earn-out and the TCS in-sourcing. As for the concept of CSM, it is significant as it represents a store of value and the present value of future profits. Over time, we will release this CSM into earnings. It's crucial to note that during the first half of the year, we made substantial adjustments due to assumption updates, which partially impact the P&L and CSM. The non-financial assumption changes amounted to over €550 million for the first half of the year. We do not anticipate further changes to morbidity improvement assumptions in the U.S., as these have been completely eliminated, so we expect no significant changes in this area going forward. However, CSM will be released gradually, tied to Financial Assets, and the release will take a considerable amount of time due to a long-term duration exceeding 14 years. Most importantly, while this primarily reflects the insurance aspect of our business, we will benefit from new business influx in life insurance, which you will witness. Additionally, the non-insurance sectors are set to grow. As we've consistently stated, we aim to enhance the quality of our earnings over time. Eliminating the morbidity assumption will improve our operating results in that business area and enable us to pursue premium rate increases, translating to actual cash that would be unattainable without this change.
Operator, Operator
We will now go to the last question for today. And the last question for today comes from the line of Michele Ballatore from KBW.
Michele Ballatore, Analyst
Yes. The first question is about the growth in U.S. Individual Life, which was strong. How should we consider the impact on profitability from this growth, particularly regarding capital generation? The second question is about Asset Management. Although it hasn't been a great half year, what is the outlook for that segment? What actions are you taking, and what is the specific outlook for this segment?
Lard Friese, CEO
Thank you, Michele. I'll discuss the Asset Management business before passing it to you for details on the profitability of the Individual Life segment with Matt. In terms of Asset Management, the first half of the year has presented us with various challenges that we need to adapt to. Year-over-year, we've observed a significant rise in interest rates affecting our large fixed income investment portfolio, which in turn impacts the fees we generate. Additionally, as I mentioned earlier, the shaky economic climate in China affects investor sentiment, leading to €60 million in outflows from our third-party business there. This environment is a reality we must face. To adapt, we have two main strategies. First, we are implementing expense reductions, which are already noted in the first half of the year. While they haven't completely offset the revenue losses, we're actively pursuing further cuts, and our plans for this are already in motion. Expect to see more of this in the future. Second, we are concentrating on investment strategies where we believe we have a competitive advantage and can succeed, such as alternative fixed income strategies and real asset strategies, including CLOs. We are not just focusing on these in our sales efforts to attract new mandates; we have also acquired a CLO platform and team to enhance our CLO capabilities. Additionally, we have expanded within La Banque Postale Asset Management to bolster our competencies there, and we will keep progressing in these areas. Overall, we're adapting to a new reality by reducing expenses, increasing efficiency, and focusing on strategies where we excel, ultimately attracting higher fees based on the assets we manage. Matt, over to you for Individual Life.
Matthew Rider, CFO
Let's begin by discussing the manufacturing aspect, which I believe is the core of the inquiry. As Lard mentioned, we have observed robust growth in Individual Life sales in the U.S., which is encouraging. We are also consistently experiencing an increase in New Business Strain, and we see this positively. The reason we appreciate this is that we have managed to sustain price internal rates of return exceeding 12% on our overall Life book. This segment of our business is highly profitable, and we are eager to write more policies, especially for younger clients. It is a solid business opportunity. Additionally, I want to highlight that while manufacturing is one element of our operations, we also have the WFG as a distribution channel in the U.S. The capital generation from WFG mainly comes from distribution earnings, which are rising in tandem with sales and experiencing some leverage effects. On the Life side in the U.S., we are making significant progress, maintaining our pricing margins, and overall, the trends are moving in a positive direction.
Operator, Operator
Thank you. This concludes the Q&A session. I would now like to hand the call back over to Hielke Hielkema for closing remarks.
Hielke Hielkema, Investor Relations Officer
Thank you, operator. This concludes today's Q&A session. On behalf of Lard and Matt, I want to thank you for the interaction. If you have any remaining questions, please do get in touch with us in Investor Relations. Thanks again for your participation in today's call, and have a good day.
Operator, Operator
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.