Aegon N.V. (NYSE:AEG) Q3 2021 Earnings Conference Call November 11, 2021 3:00 AM ET

Company Participants

Jan Weidema - Head, Investor Relations
Lard Friese - Chief Executive Officer
Matt Rider - Chief Financial Officer.

Conference Call Participants

Andrew Baker - Citi
Michael Huttner - Berenberg
David Barma - Exane BNP Paribas
Fulin Liang - Morgan Stanley
Michele Ballatore - KBW
Henry Heathfield - Morningstar
Benoît Pétrarque - Kepler Cheuvreux
Robin van den Broek - Mediobanca
Farquhar Murray - Autonomous Research

Jan Weidema

Good morning, everyone, and thank you for joining this Conference Call on Aegon’s Third Quarter 2021 Results. We would appreciate it, if you could take a moment to review our disclaimer on forward-looking statements, which you can find at the back of the presentation.

With me today are Aegon CEO, Lard Friese; and CFO, Matt Rider, who will take you through the key points for this quarter.

Let me now head over to Lard.

Lard Friese

Thank you, Jan Weidema. Good morning, everyone. We appreciate that you are joining us on today's call and we look forward to updating you on our third quarter results.

In my part of the presentation, I will take you through the strategic highlights and through the progress we have made on our strategic assets. Matt Rider will then go through the details of the results and our capital position. He will also summarize the actions we have taken to further strengthen our balance sheet and to manage the financial assets. Finally, I will conclude the presentation with a wrap-up, after which we will open the call for a question-and-answers.

So let's move to slide 2. In the third quarter of 2021, we continue to drive our transformation forward by delivering on our financial and strategic commitments. And I am encouraged to see this reflected in our results. These results are supported by the benefit from expense savings initiatives. And we remain on track to deliver on the three-year target of €400 million expense savings.

In our strategic assets and growth markets, we are benefiting from the growth initiatives that we have implemented. And our asset management business extended its track record of over nine years of positive third-party net deposits. We saw an improvement in performance across most of our businesses. This was offset by adverse claims experience in the US with COVID-19 and a higher average claim size being the most important drivers. As a consequence, the operating result decreased by 16%. We expect the impact from COVID-19 to abate over time. In addition, we want to reduce the volatility and mortality experienced in the US and are looking at management actions to mitigate this.

In the third quarter, we remain proactive in managing our financial assets. We launched a lump-sum buyout program for certain variable annuity policyholders, which was well-received by customers. Moreover, the guarantees on the remaining variable annuity portfolio are now being fully hedged against equity and interest rate risk.

Furthermore, we have almost fully executed our plan management actions to reduce interest rate risk in the US, which has led to a significant reduction in our interest rate exposure. In our long-term care business, we have already achieved approval for more than US$300 million worth of rate increases. And consequently we have increased our expectations for the rate increase program to US$450 million is underscores our track record of actively managing this business.

Our balance sheet remains strong and in line with our disciplined capital management framework. The capital ratios of all three main units are above their respective operating levels, and our group Solvency II ratio increased to 209%. We've also strengthened Aegon’s approach towards corporate sustainability. Last week, we announced Aegon’s group wide commitment to transitioning our general account investment portfolio to net-zero greenhouse gas emissions by 2050 with an intermediate goal set for 2025. This further underpins our concrete action plans to create lasting value for all our stakeholders.

Lastly, we continue to work together with the Vienna Insurance Group to close the divestment over our businesses in Central and Eastern Europe. VIG is continuing its constructive dialogue with the Hungarian Ministry of Finance to clarify possibilities for a positive conclusion of the acquisition.

Let me now give you an overview of where we stand with the execution of our operating plan. On slide number 3 our ambitious plan that now comprises more than 1,200 detailed initiatives is designed to improve our operating performance. We are continuously adding new initiatives to this plan to make up for any delays and existing initiatives, and to capture the full potential of our organization. In the third quarter, we completed another 150 initiatives. More than 680 initiatives have now been fully implemented and are contributing to the operating results over time.

Expense savings initiatives have so far deliver €248 million of savings. So we remain on track to deliver on the €400 million expense reduction target in 2023. Initiatives aimed at improving customer service, enhancing user experience and launching new innovative products are also well underway. These growth initiatives contributed €29 million to the operating result this quarter. We intend to continue executing the expense and growth initiatives at pace.

Let's now turn to slide four to discuss the progress we have made with respect to our strategic assets. Our priority here is to grow the customer base and expand our margins. In the US Individual Solutions business, we have the ambition to regain a top five position in selected life products over the coming years. In the third quarter, new Life sales improved by 13% mainly driven by indexed universal life and whole life final expense products.

Sales are benefiting from a 24% increase in licensed agents and World Financial Group from a funeral planning benefits for eligible indexed universal life policyholders. Whole life final expense sales increased following enhancements made both to the product and the application process.

In the US retirement business, Transamerica aims to compete as a top five player in the new middle market sales. This business continued to build momentum with the fifth consecutive quarter of written sales of over US$1 billion in the third consecutive quarter of positive net deposits.

So let's turn to our Dutch strategic assets in slide number 5. We are market leaders in both mortgage origination and new sale defined contribution pensions. We saw continued commercial momentum in these businesses in the third quarter. Mortgage sales amounted to €2.7 billion as we benefit from our strong origination capabilities. About two-thirds of off consisted of fee based mortgages originated for third-party investors through our Dutch mortgage funds – mortgage funds.

In our workplace business, we saw a 6% increase in net deposits for new style defined contribution products. Assets under management for this business increased to €5.6 billion at the end of the quarter, underscoring a leading position in this market. As you are aware, we want to develop our online bank Knab into a digital gateway for individual retirement solutions. In the third quarter of 2021, the online bank attracted 9,000 new fee paying customers. This was offset by 11,000 customers leaving Knab stemming from our decision to stop offering savings products to non-fee paying customers as they were loss making.

Moving on to the United Kingdom, assets under administration remained above the £200 billion. Gross deposits increased, reflecting stronger investor sentiment, as well as the benefits from ongoing investments in the business is led to an improvement in retail net deposits. However, this was more than offset by the termination of a low margin investment only scheme in the workplace segment, which led to net outflows in this business. Expense savings initiatives and the favorable impact for market movements on assets have led to improvement in the efficiency of the platform. This more than offsets the revenues lost from the gradual runoff of the traditional product portfolio.

Let me now turn to our global asset manager and growth markets on slide number 6. Our asset management business the operating margin of global platforms almost doubled as a result of higher revenues from net deposits and favorable market developments. Third party net deposits on the global platforms amounted to €2.4 billion driven by inflows on the fixed income platform.

Net deposits and strategic partnerships were €1.3 billion for the quarter, driven by a joint venture in China. Continued net deposits together with favorable equity markets have led to a significant increase in management fees. This was offset by a normalization of performance fees, compared with the exceptional levels seen in the same period last year, resulting in a decline in the operating results for strategic partnerships to €44 million.

To drive further growth, Aegon asset management's wholly-owned subsidiary in Shanghai has completed its onshore investment advisory registration. This allows us to provide a range of global investment solutions, including those with an ESG focus to Chinese institutions and high net worth investors. Aegon’s growth markets we continue to invest in profitable growth. Sales growth and the bancassurance channel in Spain and Brazil was however offset by lower New Life sales in China caused by an industry wide lower demand for critical illness products.

New premium production for property and casualty and accident and health insurance increase to €21 million as a result of sales of new products in Spain and Portugal, as we continue to see benefits for sales after the redesign of our digital sales channels through our Spanish bancassurance partners.

I am now on page number 7. Turning to a topic that's in all -- that is on all our minds, sustainability and climate change. Our stakeholders in the wider world expect us to act sustainably as an insurer, as a manager and employer. We recognize the role that Aegon plays in society with respect to responsible investing and we continue to progress with our approach to sustainability.

Coinciding with the COP26 Conference in Glasgow, we announced Aegon’s group wide commitment to transitioning our general account to net zero greenhouse gas emissions by 2050. In this context, Aegon has joined the net zero asset owner Alliance. United Nations convened group of institutional investors committed to transitioning their portfolios to net zero greenhouse gas emissions.

To ensure progress towards this 2050 commitment, Aegon has set an intermediate target by 2025, we aim to reduce the carbon intensity of our corporate fixed income and listed equity general account assets by 25% compared with 2019. On our path to net zero, we will regularly update our group wide exclusion criteria and increase our engagement with the most carbon intensive companies in our investment portfolio to achieve real world carbon emission reductions.

Next to our group wide initiatives, our local units are taking additional actions and are working to meet the demand for ESG products from our customers. For instance, Aegon asset management has joined the net zero asset managers initiative and our Dutch business will commit to an extended 2050 Climate Action Plan to include separate account assets and off balance sheet investments in addition to general account assets.

Ahead of COP26, Aegon UK in partnership with Aegon Asset Management launched its innovative Global Sustainable Sovereign Bond Fund. The fund invests in those countries that are making the best progress towards the United Nations Sustainable Development Goals and allows our workplace pensions customers to align their investment objectives with the goal of a fair and sustainable future.

In summery, we continue to deliver on our strategic priorities and are making steady progress in growing our Strategic Assets and Growth Markets. We will continue to drive efficiencies, while at the same time investing in products and services that better serve our customers in various core businesses.

And with this, I would like to hand it over to Matt, who will talk about the results for the quarter and update you about our actions on the financial assets.

Matt Rider

Thanks, Lard and good morning, everyone. Let me start with the financials on slide nine. Our operating results decreased compared with the third quarter of 2020 to €443 million. Increased fees from higher equity markets and positive contributions from growth were more than offset by adverse claims experience in the U.S., which was mainly attributable to COVID-19 and a higher average claim size.

Our balance sheet remains strong, with the capital positions of all our three main units firmly above their respective operating levels and the group Solvency II ratio at 209%. Cash capital at the holding decreased to €961 as anticipated and now sits in the middle of the operating range. The decrease reflects the payment of dividends and use of cash for additional deleveraging.

Since mid-2020, our gross financial leverage has reduced by €700 million, and now stands at €5.9 billion. This puts us on track to meet our target of reducing our gross financial leverage to €5 billion to €5.5 billion. We have also made good progress on the reduction of our economic interest rate exposure in the U.S.

We have now almost fully executed the interest rate reduction plan, that we announced at the Capital Markets Day, by lengthening the duration of our asset portfolio and expanding the forward starting swap program. Together with the expansion of the dynamic hedging program for variable annuities, and favorable market movements, this has led to a 75% reduction in the targeted interest rate risk, since the third quarter of 2020.

Let me now turn to slide 10. To go into more detail on the expense savings, in the last four years as we reduce addressable expenses by €253 million, compared with 2019, €248 million of these savings are driven by expense initiatives that are part of our operational improvement. This level of expense savings is comparable to what we had achieved through the second quarter.

The benefit of the additional cost savings initiatives implemented this quarter was offset by higher one-time employee expenses. Our progress makes us confident that we will be able to achieve our expense savings target of €400 million by 2023. When we created our operational improvement plan, we took into account the nature and complexity of the underlying initiatives.

Most of the initiatives that we have implemented so far were relatively straightforward and lead to savings coming through with a short lead time. Let me give you an example. We've implemented changes in our ways of working. For instance, in our risk and communications departments, we found ways for the Holding and Aegon The Netherlands to work more closely together with shared processes enabling a reduction in overall headcount. Another example is in our Individual Solutions business in the United States, where we have reduced the number of software subscriptions.

In the coming quarters, we expect to see a more gradual delivery of expense savings. While we will continue to execute on our expense savings initiatives, we also need to absorb expense inflation and other upward pressures on expenses. In addition, some of the larger initiatives are still in progress and will take some time to fully execute. Example is Aegon asset management's migration to a new technology platform for its global operations that will drive expenses down and make the business more scalable and client focus.

Next to the expense savings, we've benefited again from lower travel and marketing activities due to the impact of the COVID 19 pandemic. These benefits are starting to fall compared with previous quarters, and we expect them to go to zero over time.

Furthermore, we aim to profitably grow our business by improving customer service, enhancing user experience, and launching new innovative products. These growth initiatives resulted in €30 million of expenses in the last four quarters.

Let me now turn to slide 11. In the third quarter of 2021, our operating results amounted to €443 million, a decrease of 16% compared with the same period last year. The apples-to-apples decrease this 13% at constant currencies, when adjusted for the reclassification of the operating results of our CEE businesses to other income.

The decrease in the operating result was driven by adverse claims experienced in the U.S., which amounted to €93 million. Deaths that were directly attributable to COVID-19 were in line with our expectations relative to US population deaths.

Furthermore, we saw a higher number of claims due to respiratory diseases this quarter. While the death certificates did not attribute all of these benefits to COVID-19, we believe that some of them are related to the virus. Deaths directly and indirectly attributable to COVID explained approximately one half of the adverse claims experience.

About a quarter of the adverse mortality experience related to a higher average claim size. In line with our aim to improve our risk profile, we want to reduce the volatility and mortality experience and we're in the process of exploring management actions to achieve this.

The remaining adverse mortality was from increased frequency in line with what we have seen in the wider industry this quarter. The adverse mortality experience was partly offset by €23 million euros of favorable morbidity experience in the long-term care book, which included a €14 million release from the incurred but not reported reserve.

In The Netherlands, the operating result increased by 8% to €190 million. All lines of business contributed to the higher result, supported by the benefits of expense savings, business growth, and favorable disability claims experience.

In the UK, the operating result increased by 47% to €51 million, driven by higher fee revenues as a consequences of favorable equity markets. The operating results from international decreased by 17% to €36 million. However, on an apples-to-apples basis and on constant currencies, the operating result increased by 18%. This reflects the business growth and favorable claims experience in Spain and Portugal and reduction in crediting rates at Transamerica Life Bermuda.

Finally, the operating result from asset management remains stable at €58 million. Higher management fees offset a normalization and performance fees from Aegon’s Chinese asset management joint venture compared with last year's exceptional level.

Let us now turn from operating results to net result on the next slide. As you can see on slide 12, the net loss amounted to €60 million for the third quarter of 2021. Non-operating items contributed to a gain of €9 million before tax. Realized gains on investments of €132 million and net recoveries of €7 million, more than offset a loss from fair value items of €130 million.

The latter resulted from an increase in the fair value of liabilities in the Netherlands. This was driven by an increase in inflation expectations and to a decrease in the own credit spread used to discount certain liabilities.

Other charges of €559 million were largely driven by a €470 million charge, relating to the expansion of the variable annuity dynamic hedging program in the United States, as well as to the lump-sum buy-out program in line with prior guidance. One-time investments related to the operational improvement plan amounted €64 million.

I'm now turning to slide 13 to go through the capital positions of our main units. The capital ratios of our three main units ended the quarter above their respective operating levels. US RBC ratio increased by 2 percentage points during the quarter to 446%.

The RBC ratio was adversely impacted by negative separate account returns in the variable annuity business. Interest rate movements during the quarter result in a loss on the macro interest rate hedge that was scaled up in anticipation of the expansion of the dynamic hedge program.

The capital release from the lump-sum buy-out program was offset by the impact of expanding the dynamic hedge program. This led to a combined negative impact of 2 percentage points on the RBC ratio in line with prior guidance.

In the Netherlands, the Solvency 2 ratio of the Dutch Life unit remains stable at 172%. Negative market impacts from rising inflation expectations and credit downgrades more than offset positive impacts from real estate revaluations, mortgage spread tightening and a flattening of interest rates.

Operating capital generation had a positive impact, which more than offset the €25 million dividend payment to the Group in this quarter. Scottish Equitable are main legal entity in the UK, increased the Solvency ratio to 171%. Strong operating capital generation had a positive impact, and there were some benefits from a number of smaller one-time items.

Let us now turn to the development of cash capital at Holding on the next slide. As anticipated, cash capital at the Holding decreased during the quarter to around the middle of the operating range.

In the third quarter, gross remittances amounted to €99 million. These were in part driven by capital released as a result of winding down both our Irish corporate insurance entity and our internal reinsurer Blue Square Re. These remittances contributed to free cash flows to the holding, which were €62 million this quarter.

This brings year-to-date free cash flows to €312 million and puts us in a good position to exceed the 2021 free cash flow guidance that we provided at our capital markets today. These cash inflows were more than offset by the payment of dividends and previously announced redemption of US$250 perpetual capital securities.

Capital injections amounted to €53 million and were mainly driven by injections into our Brazilian joint venture that we had flagged last quarter. Other items led to a cash outflow of €29 million euros, by the previously announced share buyback in the context of variable compensation plans.

Let me now turn to our financial assets, starting with the US variable annuities business on Slide 15. We are taking both bilateral and unilateral actions to maximize the value of our US variable annuities business. Last quarter I highlighted two of them, the lump sum buyout program and the expansion of our dynamic hedging program. The lump sum buyout program was launched in July. This program was made available to certain variable annuity policyholders with guaranteed minimum income benefit riders. The program reduces Transamerica’s economic exposure at a favorable price, reduces hedge costs with the remaining variable annuity portfolio going forward.

At the end of the third quarter, the take up rate of the program now to 8% which is encouraging and exceeds those of similar programs run by Transamerica in the past. We've decided to extend the programs to the end of January 2022 to allow customers more time to consider the offer. We expect to take up rate by the end of January 2022 to exceed the original expectation of 15%.

In the third quarter of 2021 Transamerica also scaled up the existing macro hedges in anticipation of the transition to a dynamic hedge program for all remaining legacy variable annuity policies. The dynamic hedging program was expanded in the first week of October and now covers the interest rate and equity risks embedded in the guarantees of our entire variable annuity portfolio.

This builds on the dynamic hedging program that we have operated for policies with guaranteed minimum withdrawal benefits, where the hedge effectiveness for the targeted risks amounted to 98% year-to-date. Dynamic hedging stabilizes cash flows and reduces our sensitivities to changes in equity markets and interest rates on an economic basis.

The combined impact of extending the dynamic hedging to the full portfolio of variable annuities, together with the execution of the lump sum buyout program was in line with prior guidance with a 2 percentage points negative impact on the RBC ratio. Another action that was implemented in the third quarter was an increase in rider fees on part of the variable annuity portfolio. Certain contracts allow policyholders to elect the step up of the guarantee base on a policies rider anniversary. If the policies account value exceeds the guarantee base. Transamerica will increase the fees to the contractually allowed maximum when a step up is elected. This is a good example of our ongoing commitment to actively manage this financial asset. Ensure unilateral and bilateral actions to maximize the value of our variable annuity portfolio are well underway. Therefore, we have begun allocating internal resources to investigate our options for potential third-party solutions. We will update the market on our progress in this respect in the first half of 2022.

Let's now go to slide 16. We have progress well on the enforce management of our long-term care book. In the third quarter of 2021, Transamerica obtained regulatory approvals for additional rate increases of $133 million, bringing the value of approval achieved year-to-date to $309 million. This means that we have already achieved the expected $300 million benefit from this program, which underscores our track record of achieving actuarially justifiable rate increases.

Based on these better than expected results to date, we've increased our expectations for the benefit from the current rate increase program from $300 million to $450 million. Long-term Care claims for the third quarter came in at an actual to expected ratio of 83%. The level of new claims has returned to pre-pandemic levels. The claims experience reflects a $16 million release of the incurred but not reported reserve that was previously set up for delayed Long-term Care claims. Excluding this release, the actual to expected claims experience for the third quarter of 2021 would have amounted to 95%, reflecting increased claims terminations, due to the impact of the COVID-19 pandemic.

Let me now turn to slide 17. Our aim for the Dutch life business -- is turn it into a low risk cash generator paying predictable regular dividends. The Dutch life business again remitted €25 million to the group in the third quarter, in line with its quarterly remittance policy. Solvency II capital ratio of the Dutch life business remained unchanged this quarter at 172%. And once again above the operating range.

In the second half of October, the Dutch life business implemented an expense inflation hedge to further reduce the volatility of its capital ratio. To summarize, we continue to actively manage our risk and our capital position to name a few examples. We've nearly completed the interest rate risk reduction plan in the US. We extended the dynamic hedging program to our legacy variable annuities. We expect to exceed our original expectation of a take up rate of more than 15% with a lump-sum buy-out program. We increased our expectations for the Long-term Care rate increase program to $450 million. And we remain on track to achieve our expense savings target. And we will continue to take actions to improve their risk profile.

With that I pass it back to you, Lard.

Lard Friese

Thanks, Matt. So the takeaway from today's presentation is that we continue to drive our transformation forward by delivering on our financial and strategic commitments through a disciplined execution of our operational improvement plan and active management of the enforced business. Adverse claims experience aside, the operating results developments encouraging and supported by the disciplines implementation of our operational improvement plan.

We have reached important milestones for our financial assets as Matt, just laid out. We are benefiting from growth initiatives in our strategic assets and growth markets. And we have committed to net zero greenhouse gas emissions targets by 2050. In summary, I'm satisfied with how we continue to deliver on our financial and strategic commitments.

And I would like to open the call now for your questions. In the interest of time, I kindly request you to limit yourself to two questions per person. Operator, please open the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] So first question comes from Andrew Baker from Citi. Please go ahead.

Andrew Baker

Great. Thanks, guys. Thanks for taking my questions. So, first roughly on capital generation. First specifically to the third quarter. Seems like there's quite a lot of moving pieces, are you able to give an update on your view of the normalized run rate? So I guess the comparable number to the previous €318 million pre-holding company costs that you provided and maybe just talk through some of the moving parts of the quarter? And then secondly, related to the medium term view, when can we expect an update to the €1.3 billion 2023 target? And then can you also just confirm whether that included an assumption for a 15 basis point reduction in the UFR? And if so, can you just remind me what the impact of that was? Thank you.

Lard Friese

Matt? Thank you very much Andrew for your question. So Matt, can you take…

Matt Rider

Yes. So maybe, maybe I can walk you through the operating capital generation guidance that we have now for the full year. And I can walk through some of the moving parts here. So if you take the 3Q operating capital generation, after the holding and funding expenses that was €327 million. Add back the holding and funding expenses and you get to €390 million operating capital generation again before holding in funding expenses.

And then some of the puts and takes I mean, we had as I mentioned earlier, we had adverse claims experience on the mortality side, we had benefits on the morbidity side but if you back that out, that's -- it adds about €60 million to the run rate. And then we did have some good guys that you have to back out too. So in generally you can you can walk through it, but it's about €50 million, so that leaves you with a clean run rate for the quarter of about €400 million.

And then as you look forward to the end of the year, we have we -- actually year to date operating capital within the business units before the holding and funding expenses amounted to about €1.1 billion. As a 400 cleaning from the run rate for the fourth quarter and then subtract out our expectations for COVID in the fourth quarter, which amounts to about €40 million, and then take about €10 out for the impact of the dynamic hedging. Remember, that does reduce the operating capital generation going forward. And you get sort of right around the midpoint of that €1.4 million to €1.5 billion range that we that we communicated last quarter and that – and we're going to retain that for the supporter. I hope that -- I hope that helps.

Andrew Baker

And the medium term view?

Matt Rider

Yeah, and whether it includes – whether the target includes part reduction. So you are right, so at the Capital Markets Day, we had included a €1.3 billion targets for 2023, that does not by the way include any impact from the 15 basis points reduction that we would now anticipate not happening in 2023, which would actually add another about €100 million of operating capital generation. But there -- we always remind people that there are some headwinds here. We do have still continued low interest rates, credit impairments are likely to step up here. We're not changing the guidance at this moment in time. But in general, we're getting the benefit from headwinds, and you can see it coming through in our operating cash gen guidance for 2021.

Andrew Baker

Okay. Thank you very much. Very clear.

Operator

Michael Huttner from Berenberg. Please go ahead.

Michael Huttner

And thank you very much. And can you talk a little bit about the take-up rate expectation, which you're seeing where we are now at the end of October or actually mid November in terms of take-up? And what kind of impact this could have in terms of RBC, I think at September the 8% was 3.5%. And I was trying to gross it up, but I'm not very good at math.

And then the other question is on the morbidities. I understood from your comments 23 million in Q3, including €16 million of reserve releases. And we kind of done with morbidity benefits, or is there potentially still more to come, or is the €300 million pricing you've spoken about when will we see that in the numbers? Thank you.

Matt Rider

Yes. So let me your take-up rate question first. So indeed, the experience on the lump sum buyout program through September stood at 8%. If we looked at it yesterday, it was about 14%. And that's, you can't really extrapolate that going forward, because the program itself ended at the end of October. And as you might expect, a lot of the take-up came at the very last part of it.

So as of right now, it's about 14%. Now, what we are going to do is extend that offer forward through the end of January in 2022. So that 14% will accumulate. It will get bigger, but probably a slower pace than what we saw in the first stage of the program.

With respect to the morbidity experience, yes, indeed, we are still getting morbidity benefits. However, we see that the entrances to long-term care facilities are picking up in line with pre-COVID levels. We are going to be you saw that we released a portion of the IBNR reserve in the fourth quarter, -- sorry, in the third quarter, we'll release the remainder of the $44 million IBNR our reserve pretty much level throughout to 2Q of next year.

On the rate increases, indeed, we had exceeded our expectations on the long-term care price increases to now we stand a little bit more than €300 million. And we are extending that and we now put a target out there €450 million, a €100 million of that is going to be reflected in what we say our premium deficiency reserve by the end of the year. And the balance of that will come in over time. You'll see it reflected in capital generation over time.

The other question that you had was the also impact on RBC, in the -- so the overall program impact was 3.5%, so it improved ratio by 3.5%. And we would expect that again, it'll -- we're going to extend the program that again -- that was based on a -- based on the 8% take up rate. We would expect to get incremental improvements through the end of January. And we'll see that comes through in our RBC ratio by the end of the year and also in the first quarter of next year.

Michael Huttner

Okay. That’s helpful. Thank you.

Operator

David Barma from Exane BNP Paribas. Please go ahead.

David Barma

Hi. Good morning. On US variable annuities, just to come back on that in light of your high expectations for the buyouts take up grade in your comments made on fee increases in some contracts. Can you remind us what you expect for the run rate capital generation on that lines of please? And then secondly, on US mortality, so quite high in the quarter, and I assume that splitting COVID-related from the rest is a bit difficult, but any color on underlying trends would be helpful there? And also you say you want to take actions to reduce the sensitivity to mortality, how do you plan to achieve that? Thank you.

Lard Friese

Yes. Thanks, David. Matt, would like to...

Matt Rider

Yes, so on the VA run rate capital generation. In the last quarter, we had said that we would reduce operating caption by about $50 million, as a consequence of implementing the both the also VA program and the -- or the lumpsum buyout program, and the dynamic hedging. And that we would be in a range of $200 million to $250 million to $300 million operating caption on an annual basis, and we're retaining that. So we came in pretty much exactly where we thought we were going to be. So the number is 250 to 300 on an annualized basis.

Maybe on the mortality in the US, I mean, the way that we really think about this is that we did have you could say the impacts of direct and indirect COVID claims that represented about 1.5 of the adverse experience that we saw in the border. So if you work in US dollars, we had $111 million worth of adverse mortality experience. Part of it was directly related. So that, you know, that's the case where I think it was 46 million of that was related to COVID deaths, where we get a claim in and we get a death certificate, and it's written COVID-19 as the cause of death.

But as I said, in the my opening remarks, we're also seeing elevated claims from things like respiratory illnesses, which are guiding us saying that there is a portion of other claims that are not directly COVID-related, that are more indirectly related. And then if you add those two components up, then it's like one half of the total amount of the deviation.

The other part of it is we did have an increase in the overall average claim size during the course of the quarter, which contributed to about one quarter – one-fourth of the overall for mortality experience. This is just what I would call normal average size claims deviation.

We did see a number of higher face amount contract claims that came in during the course of the quarter. You asked the question around management actions. And indeed we are going to try to take some steps here. This is typically done through reinsurance and we will be looking at that to minimize or to reduce the amount of let's say the claims volatility in terms of case size.

And then the remainder of it is we would attribute it to just frequency. Number, you know, there were just a higher number of claims during the fourth quarter, which was quite consistent with what we've seen in the US industry. So I think that will come as no surprise. I think that covers your questions.

David Barma

Thank you.

Operator

Fulin Liang, Morgan Stanley. Please go ahead.

Fulin Liang

Thank you. Two questions, please. The first one is about your deleveraging plan because if I look at the Holdco liquidity is like in the middle of your kind of target range. And -- but actually the total leverage is still above your long-term target, which apparently you still need to go to do another further half 1 billion deleveraging. Originally, I thought that was -- would be kind of with a CEE deal will be completed that would kind of give you the cash to do that. But now is the CEE deal kind of pending, would you actually can still going ahead with the delivering and target or your deleveraging is actually conditional on the CEE deal completion? So that is one first question.

On the second one is, I'm still a little bit, just clarify that number you kind of indurated your €1.4 billion to €1.5 billion clean capital generation guidance kind of for 2021. But your original strategic plan was €1.34 billion for 2023. So this seems like the kind of disconnection there, could you kind of talk me through about what's the moving blocks between the current higher target versus a slightly lower target in two years time? Thank you.

Lard Friese

Yes, certainly. So on the deleveraging side, so we are a hair below or the midpoint of the operating range for cash capital at the holding. But I would just remind you that we typically get relatively low dividends in remittances from the business units in the third quarter, a lot of the remittances come in, in the fourth quarter. So that's not a particular concern for us. With respect to the deleveraging target, we're committed to doing that 5 to 5.5 whether CEE closes or not. So we are going to continue with our deleveraging plan there.

With respect to the capital generation. So what we're targeting here is a €1.4 billion to €1.5 billion operating capital generation in the business units for 2021. And that includes everything. So that includes the effects of adverse mortality, but it does include also the benefit that we are getting from tailwinds in the equity markets, to a certain extent the interest rate markets as well. Whereas when we came out with our capital markets guidance, back in December, we were anticipating some pretty nasty markets. So low equity markets, we were anticipating still the level of COVID claims, although they're coming in a little bit higher and longer than what we had anticipated. So I guess the point here is that there's going to be if we -- if market stay the way that they are, there will be a moment in time, we will have to adjust that longer term guidance, but for right now, we're not going to do that. We're going to stick with the guidance that we do for 2021 and go on.

Fulin Liang

Okay. That's clear. Thank you.

Operator

Thank you, Michele Ballatore from KBW. Please go ahead.

Michele Ballatore

Yes. Thank you. So two questions. So, the first question is about the CEE, I mean, what is the status there? In terms of always proceeding I mean, there is a new probe on the [indiscernible], do you think there will be a point where the Insurance Group will say, well, you know, that's just not feasible. So, just an update there.

And the second question is about solvency, and on solvency especially the – so you had the positive effect on the RBC coming from the better experience in mortgage – in mortgage foreclosure, given the negative impact in the Netherlands from inflation, I want to just have a sense of this trend. How will – this will evolve in becoming porters? Thank you.

Lard Friese

Yes. Thanks, Michele. So on the Vienna Insurance Group, so we had to remind everybody we sold the business in Hungary, Poland, Romania and Turkey to Vienna –

[Technical Difficulty]

Operator

We are experiencing momentarily interruption in Cisco. Please stand by. Ladies and gentlemen, we experienced a momentary interruption to this conference call. Please continue to standby. Please go ahead.

Lard Friese

I apologize to everybody we had a little bit of a glitch in the line, I hope all of you are still there. So Michele, thank you very much for your questions. So again, Vienna Insurance Group is in the lead of getting all the required approvals. And, and they are busy doing that we are supporting them in that effort, of course. When it comes to Hungry, they are still in constructive dialogue with the Hungarian Government to try and find a way to resolve the situation. And we are just patiently awaiting the outcome of that.

And then what it is – when we talk about the solvency et cetera. So Matt, can you take that piece of the question of Michele?

Matt Rider

Yeah. So I think your first one here, you're thinking about how much of these – these points that you would raise with respect to the – the RBC ratio, for example, in the US related to that – that mortgage thing and the and the Dutch inflation expectations. On the first, the first one in the RBC ratio that that mortgage thing is really a one-off. So it doesn't have any, it's actually very small movement in the RBC ratio.

On the Dutch inflation side, they ended up – they ended up the quarter at 172% solvency. And that was negatively impacted by increased inflation expectations that they have to reflect in the – in the value of liabilities, but after – but after the quarter ended in October, they did put on additional inflation hedges. So now the movement in their own funds related to future inflation is really immunized. So that has no further impact.

Michele Ballatore

Thank you.

Operator

Our next question comes from Henry Heathfield from Morgan Star – Morningstar, sorry.

Henry Heathfield

Good morning. Can you hear me?

Lard Friese

Yes. We can hear you, Henry. Good morning.

Henry Heathfield

Great. Good morning. Thank you very much for taking my question. I think, just one question, really on this just coming back to the VIG take up rates. There's been set at 15%. If we can really excuse my ignorance, it means done during this lesson. But 15% sounds like quite a low number. And so I'm wondering if you could kind of outline how you set that number, how you set that target? And what it really relates to in the grand scheme of things?

Lard Friese

No, not quite. But could you please elaborate because our take up rates at the end of September was 8%. We have expressed that we believe that the 50% would be a real success. And by now so we're now close to quarter end, we're now since yesterday, we're at nearly 15% at 14%. And we are extending the program to the end of January. So we expect to actually to exceed the 15% rate that we internally regard a successor very successful one.

Matt Rider

I'm not keeping, I'm not disputing that 15% wouldn't be a successful level. I'm just saying essentially in my very limited understanding 15% to me from the outside sounds like a low number in terms of your offering.

Henry Heathfield

Okay.

Matt Rider

But buyout a 15%, buyout of policyholders and then 15% of those policies, you're closing 50% of the policyholders taking out that buyout offer so just from an outside perspective, not understanding and suddenly what kind of levels with a normal expected 15% discount out but quite a low number. Overall, not saying that, that's an unsuccessful number anyway.

Lard Friese

So yeah, I know understand you coming from, so let me start Henry and then Matt will expand on this. This is not our first rodeo. In fact, this is, this is a third time that we're doing also program like this. The Trans America is quite, let's experience in this. So we know how wood works. We know how to put kind of rate of cake we can expect. We know how in the entire process, the dynamic around the table works. So in that sense, in essence, we are experiencing this. But Matt, you may want to expand on what the financial benefit of this is because releasing economic value liabilities.

Matt Rider

Yeah. I mean, maybe I just expand on what Lard said. He's obviously exactly right. So we have hit this book before with previous offers, so that many have taken it in the past and now we're the third time after this. And I think a 15% take rate would be a reasonable result. We think we can get beyond that by the way, but that's really based on the -- setting our expectations based on prior experience also with this block. That's how we kind of set our target.

Maybe to put a little bit more specific maths around this, so the 8% take up rate resulted in capital generation of about US$80 million during the course of the third quarter. And that's generally pretty linear. So to the extent that we get a higher percentage than you would see commensurate levels of capital generation going forward, and I think we said earlier that they're currently we're standing at 14% on the road to 15% and will likely surpass.

Henry Heathfield

Let's take a break is a percentage of policyholders offered accepting the offer essentially.

Matt Rider

Yes, exactly. Exactly right.

Henry Heathfield

Thank you very much.

Matt Rider

Thank you, Henry.

Operator

Benoît Pétrarque from Kepler Cheuvreux. Please go ahead.

Benoît Pétrarque

Yes, good morning everybody. My question is actually on the inflation. I mean, the US inflation figure, which was pretty high actually yesterday, and we could get more inflation in the US next year. So just wanted to understand, or that could play on your US business. Normally, there is a, kind of, offset with higher interest rates. But you've edge that a lot now. So the US inflation, higher inflation could play on metric, like operating capital generation. I wanted to understand what you are there in terms of assumptions?

And also on the long-term care business, whether we should expect maybe some headwinds from that? And if actually, the price increase you've been getting this quarter is actually an offset to higher inflation going forward? So that's more broad question on -- or the US inflation could impact your business going forward? Thank you.

Lard Friese

Yes, Benoît, I'll hand over to Matt. I mean, we all know there is debate in the market ongoing to whether this inflation is temporary in nature or not. But let's not speculate on that. Matt, the question that Benoît just had on inflation.

Matt Rider

So maybe I can do inflation for, kind of, in a broader sense, but I'll come back specifically to the US in one second. So, on the first thing, I would say there are three main areas when we think about inflation risks that we have to think about.

The first one relates to the expense savings program that we have out there. So we have a €400 million expense savings program, where we are going to be facing headwinds from increased inflation, we did embed inflation expectations into that overall savings. But that could be a potential area where we would have -- where we would be -- where -- if there's more than moderate levels of inflation, then we could be at a little bit of at risk. But I would say that, and you've seen it in the presentation that that we are on track to hit our target here with respect to that €400 million program.

The other one relates and this is more to the Netherlands, and it relates to the inflation risk on the capital position. But as I said in an earlier answer, it looks like we have that one pretty much fully hedged, both from a standpoint of in the expense, inflation risk within the capital, but also with respect to the contract guarantees that we have for certain pension contracts, where it's been where a lot of that has been hedged from the very beginning, and we've expanded that program. So from a Dutch solvency ratio perspective, I think we've got that one covered off though.

So, now to get to the US, you mentioned, particularly the long-term care business, and that's where we are the most exposed to inflation risk. I always have to remind people that in the long-term care business, we're not thinking about medical inflation, we're talking more about general wage inflation. So there's a couple aspects to this, I guess the first one is that the way that the benefit is constructed to the contract holder. There are maximum amounts, both at the daily level on a policy level that we would pay out. So in a way, that is a cap to our inflation risk after that, and the policyholder is really taking on that risk themselves.

The other offset that we've seen happen in the long-term care business is, there's more of a tendency to seek at-homecare rather than to enter into the long-term care facility. We see that the expenses related to homecare, at least as far as our booker’s are concerned are about 25% less than they would be in a long-term care facility. So there is potentially some offset.

The other one is that, we have -- we've gone actively to long-term care contract holders to think about reducing the levels of their daily benefits. And in return for a lower premium or not having that next premium rate increase, and by lowering that daily benefit, or by lowering the policy benefit, then we have an opportunity to mitigate the risk of inflation going forward in that book.

So it's something that -- it's something to watch out or in general, if we get higher inflation, where it's paired up with higher levels of interest rates, then that's actually a good thing that for us, even though we have closed a lot of our interest rate gap or interest rate exposure there, we do benefit from higher interest rates. So it's a little bit of a mixed bag as far as we're concerned. But it's, I think that's about it.

Benoît Pétrarque

Okay, great. Thank you.

Operator

Next question Robin van den Broek, Mediobanca.

Robin van den Broek

Yes. Hi. Good morning, everybody. Thank you for taking my questions. The first one is on remittances, year-to-date you perhaps close with €500 million, give a little bit when we look forward, before it's more of an interesting quarter when it comes to remittances.

So given your RBC ratio is also at the very healthy level, but what should we expect there versus your target. And I was also wondering if you could include in that comments kind of regulatory movements that we can still expect? Are these assets are just changing? And changes are finally coming through in Q4?

And secondly, I guess, Lard since you first started the CEO, you haven't had much opportunity to travel and visit the business units, but over last few months, I assume you had some opportunities to do so. And I was wondering if you want us to share your experience from that? Thank you.

Lard Friese

Yes, of course, more than happy to do so. So Robin, thanks for your questions. Yes, indeed, I started as CEO in the middle of the pandemic. So I did not have a lot of chance to meet many people in person. So I've been spending a lot of my time like all of you, by the way, assuming my life away, if you will.

But over the last month, certainly after the summer, I spent quite a number of weeks in the U.S., together with our new management team there. And, a couple of observations that I have there, number one, I went to see a lot of distribution, actually. And what I found is we're all want to get Transamerica back, right.

I mean, Transamerica was a market leader in the U.S., has lost market share over the last year, so we want to improve it. So I buy the new team. We are having all kinds of plans to turn that business and make it much better performing and growing faster. And the good news that I found for all this conversation with distribution is that Transamerica is just a fantastic brand, that and many people wants Transamerica back at the top of the league tables. So, I think that's one thing that I would have as a takeaway.

Secondly, I would have as a takeaway that the new team that we put in -- that we recruited that. So, Will Fuller as the CEO and Chris Ashe as the new CFO, but also, many other appointments that we have made. So, we have appointed a new -- well, let's say counterpart to Duncan Russell. So, it's for Duncan, the key person in the US to work with Chris Giovanni. And we've also appointed a number of other financial talents and appointed Matt Keppler as a Head of Financial Assets, all people are highly experienced in this we have worked with before. And as a result, I was also quite pleased to see how they have settled in and how they are working to increase the value creation out of the variable annuity book, but also the clear separation between what we call financial assets and focus on growth and growth assets and growth product lines, I think that's in a much better place, there's more focused on the business. And there is good excitement and enthusiasm. Of course as part of the COVID pandemic, right because we still see you know, back and forth on how people can get back to the office.

I spend time with the sales teams in the US both in the retirement side as in the individual solution side. I spent time with WFG. Last week I spent time with a lot of our financial distribution partners and that's actually next week I'm again in the US to talk to distribution to work with Will on the plans for growing the business further.

So, I must say that was -- I'm spending more time on the ground with the teams. I love to do that, as you may know, but -- so that that's really good and that's at the same time, I also spent time in the UK business, et cetera. So, yes, I will not make this a travel log, but I can tell you that it's just -- I find it personally, quite a lot of fun to work hard and improving this business.

But with that the remittances, I think that's something that's on your mind. So, Matt, the questions on Robin around remittances.

Matt Rider

Yes, just as a brief reminder here, the Capital Markets Day guidance we gave for gross remittances for 2021 was something in the €600 million to €700 million range. And you also remember that we're trying to tie our cash dividend to our sustainable free cash flows. And you remember from last quarter, we had increased our dividend -- interim dividends by €0.02 a share, which gives you a little bit of an inclination, where we think that free cash flow is going.

So, in fact, it's right, so we are now -- the minimum amount of gross remittances that will get out as the units for the full year are, say, €750 million, again, at a minimum.

I think, Robin, you also asked about any other regulatory movements, I would point out the one that you would call out, we still do have a change in the risk based capital factors for certain asset classes within the US. There's a negative impact on credit. It's a bit of a positive impact on real estate. But net, net, net, you're talking about perhaps 10 percentage points negative on the US RBC ratio, and that will be reflected in the fourth quarter results.

Robin van den Broek

That's great, guys. Thanks.

Operator

And we'll now take our last question from Farquhar Murray from Autonomous Research. Please go ahead.

Farquhar Murray

Just two questions for me. Firstly, on the inflation hedge that was put on, could just get a sense of what -- whether there was cost of that going forward, and particularly with regards to capital generation?

And secondly, just into the - at the offer take-up, just to be precise. Should I take the essentially the RBC ratio struck on the 8% level, take-up that you had it to the point. And I think you kind of had to give some sensitivity, but I presume it's a couple of points on extra on top of that, given that we're going from 8% was 14% or something more. Is that fair? Thanks.

Matt Rider

So, yes, on the inflation hedge in the Netherlands, what's the impact on capital generation negligible. On the take-up rate in the US? Yes, the take up rate was 8%. I think we did the math on that to say that 8% relates to about 3.5% on the solvency ratio a little bit over seven -- a little bit over $70 million in capital generation. It was struck at that moment, so that we would anticipate further positive impacts as that goes forward.

One thing I would mention is that you remember that we did take a charge of about US$560 million related to the combination of the lump sum buyout program and the dynamic hedging. But on that one, we anticipated further movements in these kind of things. So you're not going to see that continue to bleed in over time. So we've taken all the impacts for any future take-up rate improvements, all in this quarter. So capital impacts come and then we've already taken the negatives on the IFRS I think.

Farquhar Murray

All right. Thanks so much.

Matt Rider

Thank you, Farquhar.

Operator

Thank you. With this, I will like to hand the call back over to Jan Weidema for any additional or closing remarks.

Jan Weidema

Thank you operator. This concludes today's Q&A session. On behalf of Lard and Matt, I thank you for your interest. Should you have any remaining questions, please do get in touch with us Investor Relations. We're happy to help. Have a good day and thank you for participation in today’s call.