Aegon Ltd. (AGN) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining this Educational Webinar on Aegon's approach to implementing the new IFRS 9 and IFRS 17 accounting standards. With me today is Aegon's CFO, Matt Rider. He will talk you through the presentation. The presentation consists of 2 main sections. After each section, we will have a Q&A session. The analysts on the call will have the opportunity to ask questions. But in the meantime, please remain muted. We would like to ask you to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. The aim of today's presentation is to explain the choices we have made in implementing IFRS 9 and IFRS 17 and to provide you with an understanding of the impact on our financial statements. For this reason, we will focus on our businesses outside of the Netherlands as a transaction with ASR will fundamentally change how we report our Dutch business. Please bear in mind that this is an educational webinar and that the figures that we share with you today are unaudited. Even though we have been preparing for the implementation of IFRS 9 and IFRS 17 standards, intensively, further refinements may still take place before we present results later this year, including fine-tuning our definition of the operating results. Now before I hand over to Matt, we will show you a short video to introduce some of the key choices that we have made in the implementation of IFRS 17. This video is available on our website in case you would like to watch it again later. [Presentation]

Good afternoon. And again, I would like to thank everyone for joining us today. I believe the video we just saw is a good starting point for today's session. I want to emphasize that IFRS 17 will impact our financial reporting but it does not change the fundamentals of our business nor our strategy or our approach to capital management or any of our financial targets. The first section of today's presentation will introduce how the implementation of IFRS 17 and the choices that we have made impact our financial statements. The implementation of IFRS 17 is the biggest sector-wide accounting framework change since the implementation of Solvency II in Europe in 2016. Although insurers have had some flexibility in the choices they have made when transitioning to the new standard, it will lead to more consistency and comparability between companies over time. It also increases the transparency of the drivers of earnings and reduces the accounting noise that was prevalent under the old standard. Ultimately, we believe that IFRS 17 is closer to an economic view of our business as both assets and liabilities are valued on a mark-to-market basis, making it more intuitive to understand the developments. But it is a big change to the status quo, and it will take some getting used to. Slide 6 sums up our key message on Aegon's implementation of the new standard. I want to reiterate that the implementation of IFRS 17 will not impact our strategy, our financial outlook, financial targets, our capital management approach. Our fundamental approach to managing the company continues to be based on the capitalization of our operating units under their respective local Solvency standards, cash capital at the holding and gross financial leverage. The most noticeable change under IFRS 17 is a reduction in shareholders' equity in comparison with the old standard, which is mainly the result of establishing a contractual service margin or CSM. The CSM represents a substantial stock of future value that together with the risk adjustment is expected to be released into earnings over time. As a result, Aegon's operating result is expected to increase. The dynamic here is really stock and flow. Our stock of equity decreases, but the flow of earnings increases. We had to make several choices when implementing IFRS 17. In making these choices, we aim to simplify our processes, minimize accounting mismatches and align our operating result with the capital generation of our units under their respective local capital frameworks wherever possible. Lastly, the new standard provides more insight into the economics of the business than had been the case under IFRS 4. Let us start with going into some details of the transition balance sheet. We have prepared a short video to explain the key methods used to generate transition balance sheet. [Presentation]

As the video highlights, insurers had certain choices when setting up the transition balance sheet for IFRS 17. These choices determine the level and composition of shareholders' equity and the risk adjustment and the CSM. I will summarize 4 key choices that we have made. The first key choice relates to the discount rate. When determining the best estimate liability cash flows need to be discounted. The discount rate for insurance liabilities consists of a risk-free rate plus an illiquidity premium. Aegon has chosen to set the illiquidity premium based on the expected return on owned assets, less an adjustment for credit losses. By using our investment portfolio to determine the illiquidity premium, we better align the valuation of assets and liabilities. This choice also reduces the basis risk from using an illiquidity premium based on a more generic reference portfolio, which would have been the other option. The second choice relates to the risk adjustment, which is a new concept introduced under IFRS 17. This is similar to the risk margin concept that we already know under Solvency II. The risk adjustment reflects the compensation required for bearing the uncertainty around the amount and timing of cash flows due to non-financial risks. Aegon has selected the confidence in the role approach to determine the risk adjustment, setting the confidence interval at 80%. We have also chosen to reflect the impact on the risk adjustment from changes in interest rates in the CSM for simplicity purposes. We expect that this approach will lead to a fairly stable risk adjustment over time. The third choice relates to our transition approach in cases where the full retrospective approach could not be applied. When the data is not available to apply the full retrospective approach, the standards offered the choice between the modified retrospective approach and the fair value approach. In general, our preference has been to apply the fair value approach as this allows us to value insurance liabilities at fair value independent of historical events. Where we have applied the fair value approach, we have taken into account what we believe third parties would expect to be compensated for when taking over the best estimate liabilities. To the extent that our assessment has implied a value of the liability above our best estimate, this has led us to establish a CSM at transition for these books. Lastly, for business measured under the general measurement model and using the fair value transition approach, companies have a choice between using historical rates and current market rates, with respect to the presentation of interest accretion on the insurance liabilities in the income statement. We have made different choices for different units in order to align the investment component of the IFRS operating result of each unit as much as possible with the investment component of operating capital generation under the respective local capital framework. For the income statement presentation, for most GMM business of trans America and TLB, we have used historical interest rates at the time of issue of the in-force policies to determine the interest accretion on the insurance liabilities. When constructing the transition balance sheet, the value of these liabilities is based on market rates. This results in negative accumulated other comprehensive income or AOCI as market rates at the transition date were generally lower than interest rates at the time of issue. We have elected to use fair value through profit and loss for our assets and liabilities in the Netherlands and the U.K. Consequently, we have used the market rates at time of transition to calculate the interest accretion on the insurance liabilities in the income statement. Let us now see how the application of our choices and the implementation of IFRS 9 and IFRS 17 in general, change the presentation of our IFRS balance sheet. On Slide 10, we compare Aegon's group balance sheet under IFRS 4 with a transition balance sheet under IFRS 9 and IFRS 17. On the asset side of the balance sheet, there are a limited number of changes. Intangible assets like deferred acquisition costs are included in the best estimate liability under IFRS 17 and are therefore eliminated from the asset side of the balance sheet. The remeasurement of assets under IFRS 9 means that almost all investments are now being accounted for at fair value. U.S. commercial mortgage loans are the main exception to this rule. Overall, the value of our investments on the balance sheet is not changing significantly. In contrast, the liability side of the balance sheet sees a couple of significant changes. First of all, contracts that do not contain discretionary participation features are classified as investment contracts under IFRS 9. Liabilities of about EUR 92 billion fall under this category. Insurance contracts, including contracts with investment components that cannot be separated from the insurance contract are classified as IFRS 17 contracts, a best estimate liability or BEL is calculated for these contracts as we have seen in the video. On Aegon's transition balance sheet, we will have a little more than EUR 300 billion of best estimate liabilities under IFRS 17. The risk adjustment, which is intended to cover non-financial risks has been calculated to be EUR 3.9 billion. The transition approach has resulted in a CSM of EUR 11.8 billion on the opening balance sheet. Shareholders' equity under the new standard amounts to EUR 11.7 billion. This includes the AOCI and reflects the fair value of both assets and liabilities. Recall that we have traditionally focused on shareholders' equity after adjusting for AOCI from the investments. Under IFRS 17, AOCI from both assets and liabilities are reflected in shareholders' equity, so we will focus on the reported equity going forward. Moving to Slide 11, we now zoom in on how shareholders' equity changes with the transition to IFRS 17. Compared with the equity excluding AOCI under IFRS 4, shareholders' equity at the transition balance sheet date under IFRS 17 reduces by about 1/3 to EUR 11.7 billion. We begin with shareholders' equity excluding AOCI from assets of EUR 17.8 billion. We then add back the AOCI from our investments as both sides of the balance sheet are at fair value under IFRS 17. Next, deferred acquisition costs and value of business acquired are eliminated under the new standard. This is mostly offset by the remeasurement of liabilities according to IFRS 17 which is mainly driven by the elimination of deferred liabilities and the recognition of future profits in the best estimate liabilities. Setting up the CSM and risk adjustment reduces equity but translates into higher earnings going forward. The positive revaluation reserve or AOCI from investments and a negative AOCI from liabilities results in a net negative AOCI position as shown on Slide 12. The AOCI from investments increased by EUR 1.5 billion compared with IFRS 4 to EUR 7.9 billion by moving Dutch residential mortgages to fair value accounting. The negative AOCI of EUR 10.5 billion from our liabilities results from our choice to use the AOCI option for the fair value transition. For most of the U.S. business that is measured under the general measurement model, we have chosen to use historical rates to calculate the interest accretion on the insurance liabilities in the income statement. These policies were historically written when interest rates were much higher than those at the beginning of 2022. The difference between the 2 is reflected as AOCI and shareholders' equity and will be reflected as other comprehensive income, or OCI, over time. For businesses where we have elected the fair value through OCI option, the impact of changes in the market rates on the value of both assets and liabilities will be recognized directly in shareholders' equity as OCI. As both assets and liabilities are valued using market rates, the impact of changing interest rates on reported shareholders' equity will be a lot smaller than that under IFRS 4. Again, for fair value through OCI business, going forward, we will see book value yields on assets and liabilities being realized in the income statement. As the U.S. RBC capital framework is based on book values, too, the investment component of the U.S. operating result is expected to align better with the operating capital generation under the RBC framework than if we would have made a different choice. Slide 13 shows measurement models that we have applied to our different businesses. If contracts have a significant direct participation feature linked to an underlying pool of assets, the variable fee approach or VFA is used. More than half of Aegon's best estimate liabilities are measured using the VFA models, including, for example, variable annuities in the U.S. and pension products with profit sharing in the Netherlands. For products with indirect participation features or products with a longer duration, the default model, the general measurement model or GMM, must be applied. Aegon applies the GMM to most of its life and annuities portfolios with best estimate liabilities amounting to about EUR 116 billion. Finally, the premium allocation approach or PAA is applied to short-term business. This is mainly relevant for the majority of our Spanish business and the Non-life business in the Netherlands. No CSM is recognized under the PAA measurement model and the income statement will look similar to that is that under IFRS 4. Moving to Slide 14, we show the composition of the CSM and the risk adjustment for Aegon. The size of the CSM reflects the application of the various transition approaches. In the U.S., we have applied the fair value transition approach for most of our individual life and health businesses. As previously discussed, we have established a CSM for these businesses to reflect what we believe is the value of the relevant liabilities in the eyes of third parties. The CSM of the variable annuity portfolio largely reflects the net present value of the fees in the base contracts. We used mainly the modified retrospective approach when calculating the CSM at the transition date. The majority of the U.K. CSM is driven by the traditional insurance portfolio and the platform business, which has some insurance components that are accounted for under IFRS 17. The distribution of the risk adjustment across the business is a good representation of the non-financial risks inherent in these portfolios. In the U.S., the risk adjustment mainly relates to the individual life and health business lines given the underwriting risks that are present in these lines of business. For variable annuities, the risk adjustment is limited as these products have relatively little non-financial risk. For the U.K., the risk adjustment is driven mainly by the persistency risk associated with the traditional insurance portfolio and the platform business. Let me pause here for a moment as we want to give you the opportunity to ask questions on the transition balance sheet. Please do be so kind as to focus your questions on the transition balance sheet. There will be another Q&A session at the end of the presentation for all your other questions.

Thank you, Matt. The analysts on the call who have registered upfront will now be able to ask questions. We kindly ask you to limit yourself to 2 questions per person. Operator, please open the lines for questions.

[Operator Instructions] I'll now pass you back to our host for Q&A.

Thank you, operator. While we wait for the first question from the analysts, I'll ask the first question to you, Matt. The -- you've alluded to the AOCI option that we've chosen that's something that other companies can do as well, but it's maybe quite specific to Aegon. Can you explain why we did that?

Yes. This is actually quite a key choice. We wanted to eliminate as much as possible differences between the earnings recognition under IFRS 17 and the earnings recognition under the appropriate capital standard. And for us, that means a lot of business in the U.S. is value to book value for the -- for purposes of statutory reporting. So by choosing that approach, we aligned the net investment result that we will get under IFRS 17 with effectively the net investment result that we will get under statutory earnings. Again, we wanted to minimize differences between the IFRS accounting standard and the earnings recognition under the relevant capital standard.

Thank you, Matt. Operator, can I ask you to explain once more of the procedure for the Q&A session, please?

[Operator Instructions]

I see no questions coming in. I guess that's -- people wait for the explanation on the P&L before asking questions. So that means I'm all script for seconds. Then we can go to the second part of the presentation, Matt.

Okay. So let me now continue with the second part of today's presentation. Focusing on the presentation of financial results under IFRS 17. We will show you some of the illustrative figures for the first half year results of 2022 under IFRS 17. I continue on Slide 16. To interpret our financial results, it is important to understand the rationale behind the choices we have made under IFRS 17. There are 2 overarching guiding principles that we have applied. We operate under different capital regimes, mainly the RBC framework and the Solvency II-based regulations. Capital generation under the respective framework determines the remittances that these businesses can pay to the holding. Our first principle was to align the emergence of profit under IFRS and with capital generation under the relevant capital framework as much as possible. This means that we have made different choices for Transamerica, which uses the statutory RBC framework compared to the U.K. and the Netherlands that operate under the market consistent Solvency II framework. The second guiding principle was to limit earnings volatility from accounting mismatches. Even though IFRS 17 is a more economic framework than the previous standard, accounting mismatches Canaccord, for example, from hedging. Application of these principles has resulted in 3 different choices that we have made across our businesses. First, Transamerica's life and health business falls under the general measurement model. Here, we have elected to book assets and liabilities at fair value through OCI, which results in the impact of changes in interest rates and credit spreads being recognized directly in shareholders' equity. Book yields on assets and liabilities are reflected in the income statement. Therefore, the insurance investment result is aligned with the statutory earnings on in-force business that is reflected in the RBC framework. Second, for businesses operating under Solvency II, we have elected to book assets and liabilities at fair value through profit and loss for GMM contracts. This results in the income statement reflecting market yields on both sides of the balance sheet. By making this election, we expect that the IFRS earnings will be reasonably close to the Solvency II capital generation from in-force business. We have selected this method for most business in the Netherlands and for the U.K.'s protection and annuities portfolios. Finally, Aegon has several businesses that are measured under the variable fee approach or VFA. The U.S. variable annuity business is the most relevant one. As Aegon is using derivatives to manage the financial risks associated with the guarantees embedded in these contracts, we have chosen to apply the risk mitigation option. This allows for the financial market impact of liabilities to be recognized directly in the income statement rather than being reflected in the CSM. The impact of financial markets on the value of guarantees is thus reflected in the income statement along with the results of market movements on derivatives that are used to hedge the guarantees. Consequently, this choice minimizes accounting mismatches and reduces volatility in the income statement. Let's now look in more detail at the split between the operating result and the non-operating items on the next slide. We have defined our operating result in such a way as to provide a meaningful representation of the underlying business performance. The general idea is to show exceptional and certain market-driven items as non-operating items below the line. The insurance service result under IFRS 17 represents the current period results from the insurance businesses. We expect the result to be driven by the steady release of CSM and risk adjustment, while experience adjustments from claims and expense variances in the current period can cause some volatility. The results relating to onerous contracts will be booked through the income statement according to the standard as these contracts do not have a CSM by definition. We believe that the information value of our published results is increased by reporting the impact of assumption changes for onerous contracts below the line. Furthermore, we consider financial market impacts of onerous VFA contracts as non-operating items. The insurance net investment component of the operating result is driven by 3 factors: investment income on assets backing insurance liabilities, interest accreted on insurance liabilities and the investment income on surplus assets. As under the old standard, we move realized gains and losses below the line. Similar to the way in which we have traditionally reported impairments, we will show changes in the expected credit loss reserve under IFRS 9 as a non-operating item. There will also be fair value items from investments that are booked through the income statement, for instance, in the U.K. As previously reported under IFRS 4, hedge ineffectiveness, both positive and negative, will also appear under fair value items. To increase the transparency of our business performance further, we will separate out the operating result for non-insurance fee businesses such as the U.S. mutual funds business, large parts of the result of the U.S. retirement plans business and the result of the World Financial Group distribution channel. There will also be some expenses that are not included in the best estimate liabilities, and these will be shown separately. While expenses under the normal course of business are reflected in the operating result, exceptional expenses like restructuring and one-time expenses will be reported below the line. Also, the result from discontinued operations, such as the result of our Dutch business, will be shown as other income unchanged from today's practice. After closing of the transaction, we will report the results from our stake in ASR as other income as well. You'll see on Slide 18 that we are introducing a source of earnings type of view for the operating result. Here, you can see the operating result of Transamerica for the first half of 2022 as an example of what this will look like. The operating result of the U.S. non-insurance fee business comprises businesses like mutual funds, stable value solutions and a large part of the retirement plans administration business. Also, you will find the operating result of the World Financial Group distribution channel in this line item. The larger part of Transamerica's operating result comes from the insurance business. It is driven by the release of CSM and risk adjustment as well as the net investment result. The insurance service result will see some volatility from claims and expense experience adjustments in their respective reporting periods. The difference between actual and expected claims experience for the current period are being booked in the operating result, while experienced adjustments for future periods will run through the CSM. Specifically, in the first half of 2022, the operating result was impacted by adverse claims experience in life and variable annuities. Let us turn to the next slide to have a more detailed look at the operating result for 3 key lines of business in the U.S. IFRS 17 allows to separate the expected result from experience adjustments. For U.S. Individual Life, the expected insurance service result from the release of CSM and risk adjustment amounted to USD 254 million in the first half of 2022, and is mainly driven by the run-off of the in-force block. This was partly offset by $153 million of adverse claims experience, mostly from COVID-19. As most of these products are measured with the GMM model and the transition balance sheet was set up using the AOCI option, the net investment income is driven by the spread between book yields and on assets and liabilities. For U.S. individual health, the insurance service result is mainly driven by the release of CSM of the long-term care portfolio. The favorable morbidity claims experience that we reported under the old IFRS 4 standard is now mainly reflected in the CSM rather than in the P&L. The income statement only shows the favorable experience from claims paid in the current period, while the benefit from lower expected future long-term care claims as a result of lower-than-expected number of new claims and a higher number of expected death claims, terminations is recognized in the CSM. The investment return on the assets is largely offset by the interest accretion on the liabilities. Therefore, the net investment result mainly reflects the return on surplus assets. The investment return for U.S. variable annuities is mainly driven by assets backing both the general account liabilities and the allocated capital for this line of business. The expected insurance service result will decrease over time as the portfolio runs off and the CSM is released into the income statement. In the first half of 2022, adverse experience adjustments and onerous contracts have had USD 128 million of negative impact on the operating result. Part of this was driven by impacts from lapses and other unfavorable claims experience. The impact on the operating result was amplified as some of the variable annuity contracts became onerous following the unfavorable equity market movements in the first half of 2022. Furthermore, a portion of expected expenses is being modeled based on basis points on account value for practical reasons. The market movements in the first half of 2022 reduced account value significantly, leading to relatively low modeled expenses relative to the actual expenses. The difference between the 2 is reflected in the operating result as an experience adjustment. As outlined on Slide 20, the way claims experience as reported changes fundamentally under IFRS 17. Under IFRS 4, we used to report the impact of actual claims deviating from expectations in the current reporting period. This included impacts from paid claims as well as from reserve changes. Under IFRS 17, only the impacts from current period variances between actual and expected claims experience is booked in the income statement. Future period claims experience adjustments are booked in the CSM. For example, an earlier-than-expected death and a block of profitable life insurance policies, will lead to higher-than-expected claims paid in the current period recognized in the income statement, while the loss of future profits from this policy will reduce the CSM. Under IFRS 4, we reported the impact of assumption updates under non-operating items. Under IFRS 17, the impact of assumption updates is reflected in the CSM for non-onerous contracts. Only the impact of assumption updates relating to onerous contracts are booked through the P&L as non-operating items. As a result, a comprehensive view of claims experience requires a look at both the income statement and the change in CSM. We will focus on this combined view and our future reporting on this topic. On Slide 21, we take a deeper dive into the accounting for variable annuities. In the past, the hedging of our legacy variable annuity business caused significant volatility in the IFRS net result as the hedging targets the economic liability, but the valuation of IFRS liabilities for some of the business use locked-in discount rates. This led to an accounting mismatch and resulted in a lot of fair value noise. With IFRS 17, we expect that this situation will markedly improve. The income statement should become less volatile and the accounting is better aligned with the economic hedging of the portfolio. Under the VFA method, future period impacts on the portfolio in principal impact to CSM. However, for the variable annuity portfolio, we apply risk mitigation. Therefore, impacts from financial markets on the value of liabilities are recognized in the income statement as fair value items. This matches the results of market movements on derivatives, which are also booked to the income statement, thereby aligning the accounting treatment. Any basis risk and unhedged risks for onerous contracts will also be reported as fair value items in the income statement. Overall, the new accounting standard should result in a less volatile and more meaningful net result. You will see this on Page 22, where we show the illustrative income statement for Transamerica for the first half of 2022. We expect less noise [indiscernible] as shown on the [indiscernible] compared to that, under IFRS 4 from the U.S., the operating result is mainly driven by the release of CSM. Fair value items are mainly driven by market movements of alternative assets and any hedge ineffectiveness as the accounting mismatch for variable annuities hedging disappears, and we use the fair value through OCI option for large parts of the Americas business. Realized gains and losses on investments have a similar scope under IFRS 4 and IFRS 17, while net impairments might be somewhat more pro-cyclical under IFRS 9. As the impact of assumption updates will mostly be reflected in the CSM and not in the profit and loss, the remaining amount under other charges will mainly be the result of investments on our operational improvement plan and from restructuring charges. So far, we have focused on the U.S. to explain the workings for IFRS 17. On Slide 23, we also show the operating result of the U.K. and our international businesses. The operating result of the U.K. will mainly be determined by the release of CSM from our traditional insurance portfolio and from the CSM release from the platform business, which is partly accounted for under IFRS 17. The U.K.'s operating result under IFRS 17 in the first half of 2022 was lower compared to the reported figure under IFRS 4. This is mainly due to lower earnings on the protection business. The contribution from the fee business in the U.K. is driven by investment contracts and is limited as the new business comes with upfront acquisition expenses. For our international businesses, the operating result is driven by TLB and Spain and Portugal. The Spanish business is, for the most part, measured using the premium allocation approach which leads to similar results under IFRS 17 compared to IFRS 4. The operating result of TLB under IFRS 17 in the first half of 2022, was lower compared to that under IFRS 4. This is due to gains from surrenders that are reflected in the CSM under IFRS 17 rather than in the P&L under IFRS 4. This is a good example of a difference in claims experience reporting between the 2 standards. I'm now turning to Slide 24, which shows the impact of the first half year results on Aegon's CSM position. This is the consolidated view and includes Aegon, the Netherlands. From the transition balance sheet, we started the year with EUR 11.8 billion of CSM. This balance will be steadily released into earnings over the lifetime of the policies. In the first half of 2022, this release contributed to about EUR 600 million to earnings. This amount reflects the runoff of Aegon's in-force business, including from our financial assets. Our strategic assets generated new business CSM of about EUR 200 million mainly from the U.S. Life Insurance business. New business in the U.K. consists mainly of investment contracts, which are accounted for under IFRS 9 and consequently, do not contribute to the CSM. Market movements lead to change in the BEL in every reporting period, for example, from updates discount rates. The risk adjustment is recalculated every reporting period based on the basis of the BEL. For reasons of practicality, Aegon has chosen to reflect the impact of changes to the risk adjustment from financial market movements in the CSM. Increasing interest rates over the first half of 2022 had a significant positive impact on the risk adjustment. As discussed earlier, experience adjustments and other items can also impact the CSM. For example, this included the adverse impact of lower equity markets on the value of future fees on the base contracts of the variable annuities portfolio, which is reflected in the CSM. In total, this brings the CSM balance to EUR 12.1 billion at the end of the first half of 2022. I'm now turning to Slide 25, where we show the IFRS 17 shareholders' equity roll forward for the first half of 2022. Shareholders' equity on the transition balance sheet date amounted to EUR 11.7 billion. Over the first half of 2022, this reduced to EUR 11.2 billion mainly as a result of negative comprehensive income over the period. While the group's net result was positive, the other comprehensive income was a loss of about EUR 400 million. This resulted mainly from the negative impact of higher interest rates and credit spreads on the value of surplus assets. This will reverse over time to the extent that we hold these assets to maturity. With the introduction of IFRS 17, we have also reviewed the definition of some of our performance indicators as we show on Page 26. For shareholders, equity under IFRS 17, we will no longer correct for the AOCI as shareholders' equity reflects market yields on both the asset and the liability side of the balance sheet. Therefore, we will apply a simpler definition for the return on equity and compare the net operating result with the average common shareholders' equity as reported. As a result of a lower equity, including from setting up a CSM and higher earnings reflecting the release of that CSM, the return on equity increases. We are still contemplating how we will reflect the results from our stake in ASR in the return on equity calculation after closing the transaction. As the CSM represents future profits, we include the CSM in the definition of the gross financial leverage ratio and again, use an adjusted shareholders' equity to calculate the ratio. This is in line with the emerging practice under European life insurers. The definition change does not change our capital management perspective on our debt position. We take a holistic view considering different metrics including the gross financial leverage relative to operating capital generation and free cash flow. It remains our aim to deleverage up to EUR 700 million once the transaction with ASR has closed. We are now coming to the end of our educational presentation on IFRS 9 and 17. During this presentation, we have tried to give you a comprehensive overview of what the standard means for Aegon. Let me conclude with a summary on Slide 29. The new standard fundamentally changes the way we reported the new IFRS figures financials based on our businesses. However, it does not change the way that we manage the businesses. Our strategies and our capital management approach remain unchanged. Aegon's group targets are untouched by this new standard. Under IFRS 17, we will see a lower shareholders' equity, but this is offset by setting up a CSM, which will be released into earnings over time. Our guiding principles were to better align IFRS earnings with the capital generated from our in-force books and to minimize accounting mismatches. This has guided many of the choices we have made when implementing the new standard. With this, we hope to increase the information value of our reported financial results and to provide better insight into our business performance. In the coming months, you and we as well will have the opportunities to get used to this new standard as the time line of upcoming events on the right-hand side of the slide suggests. With this, I am at the end of my presentation and as promised, now we have time for your remaining questions. Jan Weidema, do we already have someone in the queue who would like to ask a question?

Thank you, Matt. I see the first hands being raised. But before we go to your first question, I would like to hand over to the operator to explain the procedure once more.

[Operator Instructions] I'll now pass it back to our host for Q&A.

Thank you, operator. We'll start with the first question from Farquhar Murray from Autonomous Research.

And just actually, it strikes a really nice balance in terms of early quantitative disclosures actually probably 1 of the best I've seen so far. So thanks for that. And apologies, I was a little bit caught off guard and starting the first session. So actually, I might have some things that should have come in earlier. But 2 questions from me to start. Firstly, on earnings, if I crudely back up the net operating ROE numbers on the slides I seem to be arriving at kind of a net operating result that looks to be about maybe 16 mid-teens kind of higher under IFRS 17 than the original IFRS 4 framework, is that kind of a fair understanding of the magnitude direction of travel there from 1 framework?

You did that on operating results?

Using the ROE I think that's the slide, that slide with the ROE numbers.

It's not a bad way to do it. Let's just recognize going into it that the ROE number that we had presented on the slide was for the first half of 2022, which did reflect some adverse claims. So don't use it as a run rate, that's just reflecting the current period or the first half of the year results, but you have it basically right.

Yes. Okay. And then secondly, just on the CSM development on Slide 24, that's potentially actually a very useful disclosure. So 1 question is actually, are we going to get that probably systematically going forward? And then if I could ask how indicative that CSM lease and new business figures are? And is it fair to assume the kind of EUR 0.7 billion is mainly a kind of market movement should structurally be probably around 0 over time, ceteris paribus, et cetera? And in that case, is the CSM kind of running off, say, maybe 5%, 7% per annum. Is that a fair understanding of the directive travel on that balance?

So maybe to go to your last point first, the direction of travel is we would expect the CSM to roll off at something between 8% and 12% per year. That will be dependent on the CSM balance at the beginning of the year. And you have seen like in different -- let's say, different blocks of business like in variable annuities, we saw a pretty big reduction in the CSM balance over the first half of the year. Again, largely due to the impact of credit or equity markets on the present value of future fees. So the number will move around a little bit, but you can think of it as between 8% and 12% per year on CSM roll-off.

Just to be clear, is that the 8% to 12% is the CSM release figures over the first part or is that -- or to say my 7% is actually kind of a net after the new business run rate?

We tend to -- I tell you one thing. You asked a very important question at the beginning. Are we going to be providing you kind of similar type of detail going forward? The answer is yes. And it is for this reason that we will provide that detail. It is important to understand the development of that CSM in terms of what is being released in the current period versus what is being put up in terms of new business and trying to get a sense of that as well as market value movements on the CSM. So we will be providing more detail on this.

And is that market movement element kind of structurally 0 ceteris paribus?

Yes. I would say yes. But I think the best example of it would be in the variable annuity portfolio. So in the first half of 2022, you had this big reduction in equity markets that impacts the present value of future fees, and that is reflected mostly in a reduced CSM over the course of that period. So structure -- there is -- let's say, yes, there's no unstructural elements in it. It's the release of the CSM, market value movements and experience adjustments, of course, that would roll through there.

Maybe good to -- I think one of the questions also the plus EUR 0.7 billion that we show on the slide, maybe could you talk about the interest rate impact on the risk adjustment, which also [indiscernible]

Yes, that's a very big one. I mentioned it in the presentation, but in general, what's happening here is -- so you have a certain amount of the risk adjustment, which we had pegged at EUR 3.9 billion as of the opening balance sheet date. And you can imagine that, that is impacted by interest rates. So if you think about it as ongoing risk charges, the fact that interest rates have come up, lower the value of that risk adjustment. So -- but the way that we have elected to do it is that, that effectively the risk adjustment comes down, but the CSM goes up, and that is a big reason for that, I would say that plus 7. There's also some other things that roll through there, for example, foreign exchange movements. We can give you some more detail on that. But it's important to get the moving pieces. We just use this as a high-level summary of what's going on with the CSM development.

Yes. Thanks, Farquhar, and we'll be back to you later, but let's go to the next question first. Next question comes from Cor Kluis from ABN AMRO, ODDO. Cor, go ahead.

Good afternoon. Thanks for the presentation, very clear indeed. I got a couple of questions. Maybe first on the CSM release, that's from 8% to 10% -- sorry, 8% to 12%, around 10% for this year, that's EUR 1.2 billion, which is approximately the same as the operating result. Is that the right conclusion that the operating result is a little bit the same as the CSM release? Or are there some other items in the operating results in the IFRS 9, 17 going forward, which it would make it quite simple for us to create operating results? Second question is, could you help us a little bit through to making the link between IFRS 9 and IFRS 17 profits, which is quite clear. And the capital generation, you already mentioned that the earnings in-force are quite similar to the profits, but would you be a little bit more specific? Is that true for the whole group? Is -- about which profits do we talk, is that IFRS 17 and 9 bottom line profit? Or do we talk about operating profits from IFRS 9 and 17? So to get a better relation between the capital generation segment for IFRS 17 figures.

So I think the other -- Cor, the other important element that you need to look at is the net investment result on the insurance businesses. That's going to be, for example, on the life blocks, that's going to be pretty stable, I think, because we're looking at book value returns. It's negligible on the long-term care block. It's smallish on the variable annuities. But as you think about getting to, let's say, a run rate for the operating result, the key things are that insurance service result, mainly driven by the CSM and the risk adjustment release together with that net investment margin. And then there's going to be things that happen in the course of the quarter, the claims experience, the claims variance adjustments, let's say, that go through are going to be a source of some volatility, but the nice thing is that it's going to be pretty transparent as to what exactly as to what's going on.

Yes. And maybe to add to that, the first half of 2022 was quite unique, obviously, because we still had COVID death claims coming into the U.S., which you see coming through there as a negative claims experience as well as impact from onerous contracts which resulted from significant market movements in the first half of 2022.

Cor, the 1 that you didn't -- so you focused on the insurance result, of course, but I think we're showing that we are going to be giving more transparency on the operating result that is attributed to non-insurance businesses. So that -- the whole mutual funds thing, a lot of the retirement plans, administrations, stable value solutions, and that sort of thing are going to be coming through that and WFG is going to be coming through that non-insurance fee-related result.

And the Solvency II link?

Yes, the last question on the link between operating results and OCG.

Yes. I think -- so what we're trying to compare is -- so you remember that OCG has 3 basic components, right? So it's an earnings on the in-force plus a release of required capital minus a new business strain, yes. We focus on the very first one. It's the earnings on the in-force. So it's the earnings on the in-force that if we've done this about right across the group, that's going to be quite similar to the, let's say, the operating result under IFRS 17 after tax.

That's what I was looking for.

So were we, Cor.

Thank you, Cor. We'll go back to Farquhar again with your second question. Farquhar, go ahead.

Thanks again. And [ GTL ] which is one I should have asked in the first session actually, just on the kind of onerous contracts topic. Is there a deduction coming through in the current transition balance sheet? And actually, in terms of the operating results that you're showing, is there a kind of structural onerous contracts coming through that are we assume it's probably 0?

No. No, that's not the case. So when you have -- when you -- see if I can go through a little bit of onerous contract mechanics with you. So to the extent that you have an onerous contract already, then you are going to see if market is impacted, if there's a different claims experience or whatsoever, you will see it in some form in the P&L, in some form in the P&L. But it's not a structural thing. It's not a structural drag. Those things are reflected on the market value balance sheet at the moment they become onerous. Now what I would tell you is that it is possible for onerous contracts to become non-onerous in which case you will see positive impacts coming through the P&L on certain types of business. But you will see that.

I think the slide I'm trying to be referring to is actually probably '19, where I'm just trying to understand which elements of the onerous contract is flowing through the operating results? And is that kind of a structural thing that is assume it's probably 0.

So just using the -- do you want to use like the variable annuity as an example?

Maybe, yes, that might be useful, I guess.

Okay. So to the extent -- so we said that the onerous contracts are created in this case, as a consequence of equity markets reducing present value future fees to the point where the CSM goes away. Does that make sense?

Yes.

In the current period, the impact on those onerous contracts, so for example, on lapse experience or mortality experience or other claims experience, that will roll through the P&L. We can give you -- I think we can follow up with you a bit later and give you a more detailed explanation because this 1 does get a bit complicated whenever you talk about onerous contracts. But there is no structural element in it. It's not an ongoing drag.

Yes. Okay. And then the transition balance sheet impact?

Yes, I mean, there aren't any -- there are really a transition, there really aren't any onerous contracts. They are set to -- yes, you're setting a CSM to 0 effectively. So you would have seen the impact of any, let's say, unprofitable products coming through the transition balance sheet and equity.

How much was that impact?

Less than 1% of the best estimate liabilities was from onerous contracts at the opening balance sheet so it was very limited. All right. Operator, can I ask you to repoll once more?

[Operator Instructions]

Farquhar, I see you have your hand up, but I don't know whether it's by accident or whether you.

It's not by accident actually I have 1 final question, a question I should have asked at the end of that one. Just in terms of targets, what's your kind of early preliminary thinking about how you might more targets at the moment, I think there's only 1 IFRS 17 -- IFRS 4 based target within your frameworks in terms of just the operating result. Would we just expect a reframing of that into IFRS 4?

You wouldn't expect it. We don't put a target out for an IFRS operating result today. I think as you know, the targets that we put out in the market are more related to capital generation, free cash flow, things of that nature. So I would not expect anything to change at this moment with respect to the IFRS 17 implementation. We will continue to run the business on, let's say, a capital generation basis and that will not change. IFRS 17 will give you a new lens into that a little bit, but I would not expect it to be reflected in the targets, which we will talk about when we do the Capital Markets Day and the last part of June later on this year, but I would not expect IFRS 17 targets there.

Okay. So that's essentially you're ditching from 1 IFRS 4 target to 0 IFRS 17 target.

We don't have an IFRS 4 target, period. So.

You've got an underlying earnings target, maybe I'm wrong. I'll double check.

No. No.

Okay. I can see the next question is coming through from e-mail actually. It's from Michael Huttner from Berenberg. I will -- the question is coming in as we speak. It's a question, I guess, about the comparison between the U.S. OCG and the U.S. operating results. The U.S. OCG for the full year, so operating capital generation for the full year 2022 was EUR 685 million, and the operating profits was EUR 695 for the first half of 2022. Matt, can you talk about a few of the drivers there?

Yes, I can do so. Just looking at the question, you have to adjust for a few things. So the operating profit for the half year is -- so first of all, it's a pretax number and the OCG is an after-tax number. But most importantly, the OCG in the U.S. is already being reduced by the new business strain and that's where we're talking with Farquhar there that it's important to understand the, let's say, the composition of that OCG breaking it down between earnings on in-force, release of required capital in the new business strain and that's more information that we will be providing, but I think you'll see that they are more closely aligned.

I hope that answers your question, Michael. We will go to the next question online, which is from Michele Ballatore from KBW. Michele, I hope you can hear us, you can go ahead.

Yes. Yes. So if we compare the key elements of volatility between IFRS 4 and the new accounting regime, can you expand a little bit more? I mean, what kind of volatility we can expect? What are the key drivers? What is changing on a general order level, let's say?

I would say the biggest thing that's changing is the elimination of vast majority of the accounting mismatches that we've seen between IFRS 17 and IFRS 4. So you can kind of see it on that slide where we talk about the U.S. results. But really, yes, really, it becomes much cleaner. Just being able to match the asset side of the balance sheet together with the liability side, is going to be a big advantage. And like I said in my presentation, the net income actually becomes a bit more relevant. You will still see volatility in the net income number, but it will be based on things that are, I would say, more real like claims experience and the like. But a lot of those accounting mismatches disappear. So it's -- I think it's going to be a better lens for us all to look through.

You're welcome, Michele. And maybe 1 last time, operator. Could you repoll, please?

[Operator Instructions]

Okay. I see no further questions coming in. So with that, thank you, operator, and thanks, everyone online. This concludes today's educational webinar on IFRS 9 and IFRS 17. Matt and I want to thank you for your questions. Have a good day, and thank you for your participation in this call.