Aegon reports third quarter 2021 results

Aegon reports third quarter 2021 results

6 minute read

3Q 2021 Results | AEX:AGN | NYSE:AEG

Consistent execution on strategic initiatives; results impacted by adverse mortality experience

  • Net loss of EUR 60 million reflects a EUR 470 million one-time charge as a result of management actions to release capital and increase the predictability of capital generation from the US variable annuity business, in line with prior guidance
  • Operating result decreases by 16% compared with the third quarter of 2020 to EUR 443 million, as adverse claims experience in the US – with COVID-19 and a higher average claim size as the most important drivers – more than offsets increased fees from higher equity markets and the positive contribution from business growth
  • Cash Capital at Holding decreases to EUR 961 million, which reflects EUR 192 million dividends to shareholders and EUR 212 million deleveraging in this quarter
  • The capital ratios of all three main units remain above their respective operating levels; Group Solvency II ratio increases to 209%

Statement of Lard Friese, CEO

"In the third quarter of 2021, we continued to drive our transformation forward by delivering on our financial and strategic commitments. Performance improvements across most of our businesses, supported by the disciplined execution of our operational improvement plan, were offset by elevated mortality in the United States.

This quarter's operating result reflects the benefit from addressable expense savings that we have achieved so far. We remain on track to deliver our target of EUR 400 million expense savings by 2023. To date, we have executed 684 out of 1,200 performance improvement initiatives, with expense initiatives representing the majority thereof. Benefits from implemented growth initiatives can be seen in the results from Strategic Assets and Growth Markets, and our Asset Management business extended its track record of over nine years of positive third-party net deposits.

We remain proactive in the management of our Financial Assets. In the third quarter, we launched the lump sum buy‑out program for certain variable annuity policyholders. This was well received by customers, which can be seen by the 8% take-up rate as of the end of September. Moreover, since the end of the third quarter, the guarantees on the remaining variable annuity portfolio are being fully hedged against equity and interest rate risk, reducing our economic sensitivity to financial markets.

In our long-term care business, we have already achieved approval for more than USD 300 million worth of rate increases, and consequently, we have increased our expectations for the rate increase program to USD 450 million; underscoring our track record of actively managing this business. On top of that, we took a series of incremental management actions in the US and the Netherlands to improve our risk profile, maintain a strong balance sheet and increase the value of our portfolio.

While we are making good progress on our strategic and financial commitments, our US Life business experienced adverse mortality in part from the ongoing impact of COVID-19. We expect the impact from COVID-19 to abate over time. A higher average claim size also contributed to this quarter’s mortality experience. We are in the process of taking management actions to reduce the volatility in mortality experience in the United States.

Recognizing the role that Aegon plays within our broader society, we continue to progress with our approach to sustainability and responsible investing. Last week, we announced our Group-wide commitment to transitioning our general account to net-zero greenhouse gas emissions by 2050, with an intermediate goal set for 2025. 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.

And finally, as we look back at the third quarter, I also want to take a moment to recognize our 22,000 colleagues who are driving Aegon’s transformation. The pandemic has fundamentally changed the way in which we work and the way we interact with our stakeholders. And while the way we interact may have changed, our colleagues remain committed to transforming Aegon into a high-performance organization."

Aegon's strategy
Aegon is taking significant steps to transform the company in order to improve its performance and create value for its customers and shareholders. To ensure delivery against these objectives, a rigorous and granular operating plan has been developed across the Group. Aegon focuses on three core markets (the United States, the Netherlands, and the United Kingdom), three growth markets (Spain & Portugal, China, and Brazil) and one global asset manager. Aegon's businesses within its core markets have been separated into Financial Assets and Strategic Assets. The aim is to release capital from Financial Assets and from businesses outside of Aegon’s core and growth markets, and to re‑allocate capital to growth opportunities in Strategic Assets, growth markets and Asset Management. Throughout this transformation, the company aims to maintain a solid capital position in the business units and at the Holding. Through proactive risk management actions, Aegon is improving its risk profile and reducing the volatility of its capital ratios.

Operational improvement plan
Aegon has an ambitious plan that now comprises more than 1,200 detailed initiatives designed to improve the operating performance of its business by reducing costs, expanding margins and growing profitably. A total of 684 initiatives have been executed between the launch of the operational improvement plan and the end of the third quarter of 2021, of which 549 are related to expense savings.

Aegon is implementing an expense savings program aimed at reducing addressable expenses by EUR 400 million in 2023 compared with the base year 2019. Aegon has delivered on its ambition to achieve half of its expense reduction target by the end of 2021. In the trailing four quarters, Aegon has reduced addressable expenses by EUR 253 million compared with the base year 2019. Of this expense reduction, EUR 248 million was driven by expense savings initiatives. The remaining reduction in annual addressable expenses reflects expense benefits related to reduced activity in a COVID-19 environment net of expenses made for growth initiatives. These initiatives are aimed at improving customer service, enhancing user experience and developing new products. These growth initiatives contributed EUR 29 million to the operating result in the third quarter of 2021. The company will continue to execute the expense and growth initiatives at pace.

Strategic Assets
Strategic Assets are businesses with a greater potential for an attractive return on capital, and where Aegon is well positioned for growth. In these businesses, Aegon will invest in profitable growth by expanding its customer base and increasing its margins.

Americas
In the US Individual Solutions business, Transamerica’s aim is to achieve a top-5 position in term life, whole life final expense, and indexed universal life through profitable sales growth. New life sales in the third quarter of 2021 amounted to USD 87 million, which represents an increase of 13% compared with the same period last year. This was mainly driven by an increase in new sales of indexed universal life and whole life final expense. Indexed universal life sales are benefiting from a 24% increase in licensed agents at World Financial Group (WFG) and from a funeral planning benefit 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 Workplace Solutions business, Transamerica aims to compete as a top-5 player in new sales in the Middle‑Market segment of Retirement Plans. Momentum is building here with five consecutive quarters of written sales of over USD 1 billion. Middle‑Market sales were up 30% compared with the third quarter of 2020 to USD 1.3 billion. Net deposits for the Middle-Market amounted to USD 336 million in the third quarter of 2021, an improvement of USD 621 million compared with the same quarter last year.

The Netherlands
Aegon is the largest third-party mortgage originator in the Netherlands, benefiting from its scale, high service levels to intermediaries and customers, and diversified funding. In the third quarter of 2021, the company originated EUR 2.7 billion of residential mortgages – of which approximately two thirds were fee-based mortgages originated for third‑party investors – and mortgages under administration reached a record EUR 59 billion. Aegon expects mortgage production to decrease in the coming quarters due to its focus on maintaining attractive margins.

Net deposits for the Workplace Solutions defined contribution products (PPI) in the Netherlands increased by 6% compared with the third quarter of 2020 to EUR 182 million. PPI assets under management amounted to EUR 5.6 billion at the end of the quarter, underscoring Aegon’s leading position in this market.

Aegon aims to develop its 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 the company’s decision to stop offering savings products to non-fee-paying customers. Due to low market interest rates, Knab could not offer these savings products to its customers in a profitable way. Fee-paying Knab customers receive access to products, services and features that provide insight into daily banking matters and to products that help them accumulate wealth.

United Kingdom
Aegon’s platform business in the United Kingdom – excluding the low-margin Institutional business – had net outflows of GBP 459 million, while it had GBP 173 million net deposits in the comparable quarter in 2020. Gross deposits increased, reflecting stronger investor sentiment, as well as the benefits from investments in the business. This led to an improvement in Retail net deposits, which was more than offset by the termination of a low‑margin, investment-only scheme in the Workplace segment. Expense savings initiatives and the favorable impact from market movements on assets have more than offset the revenues lost from the gradual run-off of the traditional product portfolio. The platform expenses as a percentage of assets under administration decreased by 4 basis points compared with the third quarter of last year to 20 basis points.

Financial Assets
Financial Assets are blocks of business which have closed for new sales, and which are capital intensive with relatively low returns on capital employed. Aegon has established dedicated teams to manage these businesses, who are responsible for maximizing their value through active in-force management, disciplined risk management and capital management actions. To achieve this, Aegon is considering unilateral and bilateral actions as well as third-party solutions. Unilateral actions are those that can be executed fully under Aegon’s control, while bilateral actions require the interaction and consideration of other stakeholders.

Americas
An example of such a bilateral action is the lump-sum buy-out program that Transamerica launched in the third quarter. This program was made available to certain policyholders of variable annuities with guaranteed minimum income benefit (GMIB) riders. The offer could be attractive for policyholders, whose financial objectives may have changed since the issuance of their policies. Under the program, policyholders have been offered a lump-sum payment – exceeding the account value – in return for surrendering their variable annuity policies with GMIB riders, subject to certain conditions. The program reduces future hedge costs for the variable annuity portfolio, and reduces Transamerica’s economic exposure at a price that is more favorable than Aegon believes would be possible to achieve in a transaction with a third party. The take-up rate of the lump-sum buy-out program amounted to 8% at the end of the third quarter. The program included a comprehensive communication campaign to support informed decision making by customers presented with a buy-out option. So far, the take-up rate of the program is encouraging and exceeds the take-up rate for similar programs run by Transamerica in the past. Transamerica has decided to extend the offer period for the program to the end of January 2022 to allow customers more time to consider the offer. The company anticipates the take-up rate by the end of January 2022 to exceed its original expectation of 15%.

In the third quarter of 2021, Transamerica scaled up existing macro hedges in anticipation of the expansion of the dynamic hedge program to variable annuities with guaranteed minimum death benefit riders (GMDB) and the remaining policies with GMIB riders. This builds on the effective dynamic hedge program of policies with guaranteed minimum withdrawal benefits (GMWB). Year-to-date hedge effectiveness for the dynamic hedge program amounted to 98%. In the first week of October, Transamerica expanded its dynamic hedge program, which now covers the interest rate and equity risks embedded in the guarantees of its entire variable annuity portfolio. Dynamic hedging stabilizes cash flows and reduces sensitivities to changes in equity markets and interest rates on an economic basis.

The capital release from the lump-sum buy-out program was offset by the impact of expanding the dynamic hedge program to the full portfolio of variable annuities, leading to a combined negative impact of less than 5%-points on the RBC ratio, in line with prior guidance. On an ongoing basis, these actions are expected to reduce operating capital generation by around USD 50 million per year. At the same time, Transamerica’s reduced exposure to equity and interest rate risks leads to more predictable capital generation over the lifetime of the variable annuity business, and therefore increases the reliability of remittances from Transamerica.

Another unilateral 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 a step-up of the guarantee base on a policy’s rider anniversary, if the policy’s account value exceeds the guarantee base. Transamerica will increase the fees when a step-up is accepted to the contractually allowed maximum, as part of the active in-force management of this Financial Asset. 

Given that the unilateral and bilateral actions regarding the US variable annuity portfolio are well underway, Aegon has started to allocate internal resources to investigate its options regarding potential third‑party solutions. Aegon will update the market on its progress in the first half of 2022. In addition, Aegon will consider further unilateral and bilateral actions to maximize the value of the variable annuity business.

Transamerica is actively managing its long-term care business to achieve better long-term outcomes for all its stakeholders. The primary management action regarding long-term care is a multi-year rate increase program. In the third quarter of 2021, the company obtained regulatory approvals for additional rate increases worth USD 133 million, bringing the value of approvals achieved year-to-date to USD 309 million. This means that the company has already achieved the initially expected USD 300 million benefit from this program, which underscores Transamerica’s long-standing track record of achieving actuarially justifiable rate increases. Based on these better than expected results to date, the company has increased its expectations for the benefit from the current rate increase program from USD 300 million to USD 450 million.

Claims experience for the long-term care business was favorable to the company's expectations as a result of increased claims terminations due to the impact of the COVID-19 pandemic. The frequency of new claims has returned to pre-pandemic levels. Actual to expected claims experience was 83% for the third quarter of 2021, and reflected a USD 16 million release of the incurred but not reported (IBNR) 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%.

The Netherlands
The dedicated team responsible for the Dutch Life business is actively managing risks and the capital position to enhance the consistency of remittances to the Group. The main legal entity of the Dutch Life business – Aegon Levensverzekering N.V. – implemented a quarterly remittance policy in the fourth quarter of 2020, and again remitted EUR 25 million in the third quarter of 2021. Its Solvency II ratio remained unchanged at 172% compared with the second quarter of 2021. This is above the operating level of 150%. In the second half of October, the Dutch Life business implemented an expense inflation hedge, to further reduce the volatility of its capital ratio.

Growth Markets and Asset Management
In its growth markets – Spain & Portugal, Brazil and China – Aegon will continue to invest in profitable growth. The market consistent value of new business (MCVNB) from life products in Aegon’s growth markets decreased by 14% to EUR 18 million. Growth in the bancassurance channel in Spain and growth in Brazil was offset by lower new life sales in China caused by an industry-wide lower demand for critical illness products. New premium production for property & casualty and accident & health insurance increased by 36% compared with the third quarter of 2020 to EUR 21 million as a result of sales of new products in Spain & Portugal.

Aegon Asset Management aims to significantly increase the operating margin of its Global Platforms by improving efficiency and driving growth. Third-party net deposits on the Global Platforms were EUR 2.4 billion in the third quarter of 2021, driven by significant net deposits in investment strategies on the fixed income platform. This builds on Aegon’s track record of positive third-party net deposits. Annualized revenues on net deposits gained for Global Platforms amounted to EUR 4 million for the quarter. The operating margin of Global Platforms almost doubled compared with the third quarter of 2020 to 12.5%, mainly as a result of higher revenues from net deposits and favorable market movements.

To drive further growth, Aegon Asset Management's wholly-owned subsidiary in Shanghai has registered as a Qualified Domestic Limited Partner (QDLP) manager. This allows Aegon Asset Management to provide its range of global investment solutions, including those with an ESG focus, to Chinese institutions and high-net-worth investors. The QDLP registration strengthens Aegon Asset Management’s commitment to the Chinese market. Aegon Asset Management entered the Chinese domestic market in 2008 via its joint venture Aegon-Industrial Fund Management Company (AIFMC), now one of the top-10 active equity investment managers in China.

Smaller, niche or sub-scale businesses
In small markets or markets where Aegon has sub-scale or niche positions, capital will be managed tightly with a bias to exit.

On November 29, 2020, Aegon agreed to sell its insurance, pension, and asset management businesses in Hungary, Poland, Romania, and Turkey to Vienna Insurance Group AG Wiener Versicherung Gruppe (VIG) for EUR 830 million. The European Commission granted competition law clearance for the acquisition on August 12, 2021. However, the decision by the Hungarian Ministry of the Interior dated April 6, 2021 to block VIG's acquisition of Aegon's Hungarian subsidiaries remains in place. On September 20, 2021, the Budapest Metropolitan Court rejected VIG's and Aegon's joint appeal challenging this decision. Subsequently, VIG and Aegon requested the Hungarian Supreme Court to review the ruling of the Budapest Metropolitan Court on October 19, 2021. Next to that, the European Commission announced on October 29, 2021 to open an investigation to assess whether the decision by Hungary to veto the acquisition of Aegon’s Hungarian subsidiaries by VIG constitutes a breach of the European Union Merger Regulation. Irrespective of these developments, VIG is continuing its constructive dialogue with the Hungarian Ministry of Finance to clarify possibilities for a positive conclusion of the acquisition.

As earlier announced, Aegon is in the process of winding down its Irish corporate insurance entity. The company decided to combine programs for purchasing corporate insurance – such as management liability risks – and to centralize all retained risks into one existing US-based entity to achieve cost and capital efficiencies. In the third quarter of 2021, this resulted in a release of capital and a EUR 28 million remittance to the Group from the Irish corporate insurance entity.

Strengthening the balance sheet
Aegon aims to continue strengthening its balance sheet, and is taking proactive management actions to improve its risk profile and reduce the volatility of its capital ratios.

At the Capital Markets Day on December 10, 2020, Aegon announced its plans to reduce its economic interest rate exposure in the United States in order to be less dependent on financial markets and improve its risk profile. Since the third quarter of 2020, the targeted interest rate risk exposure has reduced by approximately 75%. Aegon achieved this by executing on the interest rate management plan that was announced at its Capital Markets Day and by expanding its dynamic hedge program to all variable annuity contracts. Furthermore, market movements have contributed positively. Aegon has now almost fully executed its interest rate management plan, mainly by lengthening the duration of its asset portfolio and expanding its forward starting swap program.

Corporate sustainability
On November 2, 2021, Aegon announced that it has committed to transition its general account investment portfolio to net-zero greenhouse gas emissions by 2050. This is an important step in the strengthening of Aegon's group-wide approach towards corporate sustainability. In this context, Aegon has joined the Net-Zero Asset Owner Alliance, a UN-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 a clear medium-term target. By 2025, Aegon aims to reduce by 25% the weighted average carbon intensity of its corporate fixed income and listed equity general account assets where it has control, compared with the 2019 baseline. Complementary to Aegon joining the Net-Zero Asset Owners Alliance, Aegon Asset Management has joined the Net-Zero Asset Managers Initiative. Aegon has also become a signatory to the United Nations Global Compact. Aegon intends to advance the pact and its principles as part of the company’s strategy, culture and day-to-day operations, and to engage in collaborative projects that advance the broader development goals of the United Nations, particularly the Sustainable Development Goals.

Operating result
Aegon's operating result decreased by 16% compared with the third quarter of 2020 to EUR 443 million. This was in part driven by the reclassification of the result of Central & Eastern Europe from operating result to Other income following the announced divestment of the business. Adjusted for this, the operating result declined by 13% on a constant currency basis. This was primarily the result of adverse claims experience in the United States – with COVID-19 and a higher average claim size being the most important drivers – which more than offset increased fees from higher equity markets and the positive contribution from business growth. Furthermore, there were non-recurring one-time benefits in the third quarter of last year.

The operating result from the Americas decreased by EUR 112 million compared with the third quarter of 2020 to EUR 160 million due to adverse claims experience, with COVID-19 as the most important driver. In addition, a higher average claim size added to the unfavorable result. Unfavorable mortality experience came in at EUR 93 million in this quarter, compared with EUR 28 million in the third quarter of 2020. Favorable morbidity experience was

EUR 23 million, compared with EUR 48 million in last year's third quarter. The operating result in the third quarter of last year included a one-time benefit of EUR 21 million and temporarily lower expenses, while this year benefited from higher fee revenues and investment income.

Aegon's operating result in the Netherlands increased by 8% compared with the third quarter of 2020 to EUR 190 million, with all lines of business contributing to the higher result. Expense savings, business growth and favorable disability claims experience supported the improved operating result.

The operating result from the United Kingdom increased by 57% compared with the third quarter of 2020 to GBP 44 million. This was driven by higher fee revenues as a consequence of favorable equity markets, a provision release, and lower expenses. These more than offset the impacts from the loss of earnings due to the sale of Stonebridge and the gradual run-off of the traditional product portfolio.

The operating result from International decreased by 17% to EUR 36 million in the third quarter of 2021, due to the reclassification of the result of Central & Eastern Europe from operating result to Other income, following the announced divestment of the business. Adjusting for this impact and on a constant currency basis, the operating result increased by 18% driven by favorable claims experience, portfolio growth, a one-time benefit in Spain & Portugal and a higher investment margin in TLB.

The operating result from Aegon Asset Management remained stable compared with the third quarter of 2020 at EUR 58 million. Higher management fees from Global Platforms and Strategic Partnerships – driven by net deposits and favorable market movements – were offset by lower performance fees from Aegon’s Chinese asset management joint venture.

The operating result from the Holding was unchanged compared with the third quarter of 2020. The operating loss of EUR 53 million was mainly driven by funding expenses.

Non-operating items
The result from non-operating items amounted to EUR 9 million in the third quarter of 2021, as realized gains on investments of EUR 132 million and net recoveries of EUR 7 million more than offset a loss from fair value items of EUR 130 million. A positive result on fair value investments was largely driven by private equity and real estate revaluations in the Americas and the Netherlands. This was more than offset by an increase in the fair value of liabilities in the Netherlands, resulting from a decrease in the own credit spread used to discount certain liabilities and an increase in inflation expectations. In addition, the macro hedges in the United States – that were scaled up as a transition measure into an expanded dynamic hedge for the legacy variable annuities portfolio – resulted in a loss as a result of volatile equity markets and interest rates.

Other charges
Other charges of EUR 559 million were largely driven by a EUR 470 million charge for the expansion of the variable annuity dynamic hedge program in the United States as well as the expected ultimate impact from the execution of the lump-sum buy-out program for Variable Annuities with guaranteed minimum income benefit riders. One-time investments related to the operational improvement plan amounted to EUR 64 million.

Net result
The loss before tax amounted to EUR 107 million. After the tax benefit of EUR 47 million, the net result was a loss of EUR 60 million. The income tax benefit includes the effect of tax-exempt income and tax credits in the Americas.

Expenses
Addressable expenses increased by 4% compared with the third quarter of 2020 to EUR 734 million. The benefit from additional savings from expense initiatives was more than offset by an accrual of year-to-date performance-related compensation in the United States. In addition, there was a temporary expense benefit in the third quarter of last year as a result of management measures and country-wide restrictions in the pandemic environment. Addressable expenses in both the third quarter of 2020 and 2021 exclude expenses related to Central & Eastern Europe following the announced divestment of the business.

Operating expenses of EUR 946 million remained stable compared with the third quarter of 2020. The increase in addressable expenses was offset by lower IFRS 9 / 17 project costs, and lower expenses for joint ventures and associates as a result of lower performance-based compensation in Aegon's Chinese asset management joint venture.

Sales
The Group recorded EUR 2.2 billion of net outflows in the third quarter of 2021. This was mainly the result of net outflows in the United Kingdom and the United States, which more than offset net deposits in Asset Management. Net outflows in the United Kingdom amounted to EUR 2.9 billion and were driven by the low-margin Institutional business, which can be lumpy. Net outflows for the United States amounted to EUR 2.2 billion and were mainly due to outflows in Variable Annuities as a consequence of the decision to stop the sale of variable annuities with significant interest rate sensitive riders. The businesses that Aegon focuses on for growth in the Americas had net deposits of EUR 0.6 billion in the third quarter. Aegon Asset Management third-party net deposits amounted to EUR 3.7 billion, with a positive contribution from both Global Platforms and Strategic Partnerships. In the Netherlands, Aegon recorded EUR 0.7 billion of net outflows, mainly stemming from Aegon's decision to stop offering savings products to customers of its original savings bank.

New life sales decreased by 9% compared with the third quarter of 2020 to EUR 160 million. This was mainly driven by the exclusion of new life sales from Central & Eastern Europe following the announced divestment of the business. Adjusting for this impact and on a constant currency basis, new life sales were up 2% compared with the third quarter of 2020. This was mostly driven by higher sales in the Americas; in particular higher whole life final expense and indexed universal life sales. This was partly offset by lower sales in the Netherlands following the decision to classify the Dutch life business as a Financial Asset and, over time close most products for new sales. In International sales were lower, reflecting industry-wide lower demand for critical illness products in China.

New premium production for accident & health insurance increased by 17% compared with the third quarter of 2020 to EUR 34 million mainly driven by higher long-term-care sales in the Americas. This resulted from a change in legislation in the state of Washington. Otherwise, the product remains closed for new business.

New premium production for property & casualty insurance decreased by 40% compared with the third quarter of 2020 to EUR 21 million, mainly as a result of the exclusion of sales from Central & Eastern Europe following the announced divestment of the business. Adjusting for this impact, property & casualty sales increased by 46% mainly due to higher sales in Spain & Portugal, driven by the introduction of a new household insurance product in the bancassurance channel.

Market consistent value of new business
Market consistent value of new business (MCVNB) increased from EUR 54 million in the third quarter of 2020 to EUR 112 million in the third quarter of 2021. This mainly resulted from an increase in MCVNB in the Americas, which was driven by a lower production of variable annuities following the decision to stop selling variable annuities with significant interest rate sensitive riders. In addition, MCVNB in the United Kingdom benefited from higher premium increments by existing customers, which led to higher volumes and a more favorable mix.

Shareholders’ equity
Shareholders’ equity excluding revaluation reserves increased by EUR 0.2 billion during the third quarter of 2021, to EUR 17.6 billion – or EUR 8.37 per common share – as of September 30, 2021, as favorable currency movements more than offset the payment of dividends.

Gross financial leverage
Gross financial leverage decreased by EUR 0.2 billion in the third quarter of 2021, resulting in EUR 5.9 billion gross financial leverage per September 30, 2021. This reduction was primarily driven by the previously announced redemption of USD 250 million floating rate perpetual capital securities. The gross financial leverage ratio improved from 25.8% as of June 30, 2021, to 25.2% as of September 30, 2021 as a result of the redemption.

Cash Capital at Holding and free cash flow
Aegon's Cash Capital at the Holding decreased from EUR 1,386 million to EUR 961 million during the third quarter of 2021, which is in the operating range of EUR 0.5 billion to EUR 1.5 billion. Free cash flow to the Holding of EUR 62 million resulted from EUR 99 million gross remittances – in part supported by capital release from winding down Aegon's Irish corporate insurance entity and internal reinsurer – and EUR 37 million holding funding and operating expenses. EUR 212 million cash was used to redeem the USD 250 million floating rate perpetual capital securities. Furthermore, EUR 192 million capital was returned to shareholders, reflecting the final 2020 dividend and the cash portion of the interim 2021 dividend. Capital injections amounted to EUR 53 million, and were driven by an injection into Aegon’s joint venture in Brazil. Finally, other items led to a cash capital outflow of EUR 29 million, as the previously announced share buyback in the context of the 2017-2021 variable compensation plans more than offset a one-time tax benefit.

Capital ratios
Aegon's Group Solvency II ratio increased from 208% to 209% during the third quarter of 2021, with the capital ratios of its three main units above their respective operating levels at the end of the quarter. Capital generation after holding expenses amounted to EUR 317 million for the third quarter of 2021. Unfavorable market movements totaled EUR 179 million and were mainly driven by an unfavorable impact from equity markets in the United States and the impact of rising inflation expectations in the Netherlands. One-time items amounted to a gain of EUR 170 million, mainly as a result of a decrease in mortgage loans under foreclosure in the United States and a number of smaller items in the United Kingdom. Operating capital generation amounted to EUR 327 million, and benefited from a strong contribution from new business in the United Kingdom.

The estimated RBC ratio in the United States increased from 444% on June 30, 2021 to 446% on September 30, 2021, above the operating level of 400%. The RBC ratio was negatively impacted by negative separate account returns in the variable annuity business. Interest rate movements during the quarter resulted in a loss on the macro interest rate hedge, that was scaled up in anticipation of the expansion of the dynamic hedging to also cover the legacy variable annuity block with income and death benefits. Furthermore, one-time items had a positive impact and were driven by a decrease in mortgage loans under foreclosure. The capital release from the lump-sum buy-out program was offset by the impact of expanding the dynamic hedge program to the full portfolio of variable annuities, leading to a combined negative impact of less than 5%-points on the RBC ratio, in line with prior guidance. Operating capital generation contributed favorably, and more than offset dividend payments to the intermediate holding company.

The estimated Solvency II ratio of NL Life remained stable compared with the previous quarter at 172% on September 30, 2021, which is above the operating level of 150%. Negative market impacts from rising inflation expectations and credit downgrades were partly offset by positive real estate revaluations reflecting a strong Dutch housing market, the impact of mortgage spread tightening, and a flattening of the interest rate curve at the longer end. Operating capital generation had a positive impact, which more than offset the EUR 25 million dividend payment to Group in the third quarter.

The estimated Solvency II ratio for Scottish Equitable Plc increased from 163% on June 30, 2021 to 171% on September 30, 2021, and remained above the operating level of 150%. Strong operating capital generation had a positive impact and there were benefits from a number of smaller one-time items.