2Q 2022 Results | AEX:AGN | NYSE:AEG
Steady progress on transformation allows Aegon to increase its free cash flow outlook
- Net loss of EUR 348 million due to one-time charges and a non-economic loss on interest rate hedges in the US
- Operating result of EUR 538 million; a decrease of 11% on a constant currency basis compared with the second quarter of 2021. Benefits from expense savings, growth initiatives and favorable claims experience are more than offset by lower fees due to adverse market movements and lower investment income
- The capital ratios of all three main units remain above their respective operating levels. Group Solvency II ratio increases to 214% driven by management actions and the benefit from model updates
- Cash Capital at the Holding decreases only slightly to EUR 1.7 billion at June 30, 2022, despite the impact of the previously announced deleveraging and share buyback; third tranche buyback to commence in October 2022
- 2022 interim dividend increases by EUR 0.03 to EUR 0.11 per common share reflecting sustainable free cash flow growth
- Aegon raises its 2022 guidance for operating capital generation from the units from around EUR 1.2 billion to around EUR 1.4 billion. Aegon also expects to achieve cumulative free cash flow over the period 2021 to 2023 of at least EUR 2.2 billion, well ahead of the EUR 1.4 to 1.6 billion target set at the 2020 Capital Markets Day
Statement of Lard Friese, CEO
“The first half year of 2022 was one of the most challenging periods for investors with equity markets experiencing their worst start of the year in over five decades. Volatility remained as central banks increased interest rates to curb rising inflation and the war in Ukraine continued. Against this challenging backdrop we performed well, a testament to the strength of our strategy.
Our second quarter operating result of EUR 538 million was strong, reflecting the receding impact of COVID-19 and the progress we are making on our operational improvement plan that helped offset the impact from lower equity markets. We have now executed 1,058 out of more than 1,200 initiatives as part of this plan. Expense initiatives resulted in a EUR 250 million reduction of annual addressable expenses. Across our three core markets, our Workplace Solutions businesses generated positive net deposits, supported by various growth initiatives and favorable labor market conditions. We also achieved growth in new life sales in the US, supported by a 12% increase in licensed life agents at WFG over the last year. Mortgage origination volumes in the Netherlands, net deposits in the Retail channel in the UK, and third-party net deposits in our asset management business were down versus last year, reflecting a challenging macro‑economic outlook and rising interest rates.
Our net result was impacted by a one-time charge related to reinsurance rate increases in the US, contributing to the net loss of EUR 348 million for the quarter. Nonetheless, we remain on course to deliver on our objective of growing returns to shareholders. The actions we have taken to strengthen our capital position and improve our risk profile are paying off in the current market circumstances, with the capital position of our three main units remaining above their respective operating levels. The strength of our balance sheet and the sustainable growth in free cash flow are a solid basis to raise the interim dividend by 3 eurocents compared with last year to 11 eurocents per common share.
In the second quarter we also continued to make progress in our approach on sustainability. In the United States we introduced the Emergency Savings Account product enabling employers to help their employees save for unexpected events and improve their financial wellbeing. As part of our commitment to contribute to a climate neutral world, Aegon Asset Management partnered in the launch of a USD 600 million venture in the US to acquire value-add multifamily dwellings and transition them to low-carbon, energy efficient buildings. In the UK, we moved over GBP 3 billion of customers’ assets into strategies that consider ESG credentials, as part of the commitment to make our default pension funds in the UK carbon net-zero by 2050.
Looking ahead, considering the active management of our balance sheet and our overall transformation progress, we are comfortable increasing our expectations for cumulative free cash flow over the period 2021 to 2023 from EUR 1.4 to 1.6 billion to at least EUR 2.2 billion. We also raise our 2022 guidance for operating capital generation from the units from around EUR 1.2 billion to around EUR 1.4 billion.
While uncertainty in financial markets and economic outlook is expected to remain, we will continue to stand by our customers and help them navigate through challenging economic circumstances with our expertise and high level of service. I want to thank our colleagues for their continued dedication and I am confident that together we will deliver on our 2023 strategic and financial commitments.”
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 organization. Aegon focuses on three core markets (the United States, the Netherlands, and the United Kingdom), three growth markets (Spain & Portugal, Brazil, and China) 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 the global asset manager. 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. Between the launch of the operational improvement plan and the end of the second quarter of 2022, a total of 1,058 initiatives have been executed, of which 819 are related to expense savings.
Aegon is implementing an expense savings program aimed at reducing addressable expenses and driving business growth. Aegon targets EUR 400 million expense savings from expense savings initiatives by 2023, of which EUR 150 million is expected to be reinvested in growth initiatives. In the trailing four quarters, Aegon reduced addressable expenses through expense savings initiatives by EUR 250 million compared with the base year 2019. Aegon remains confident in delivering on its expense savings target, while absorbing expense inflation. These expense savings were partly offset by EUR 65 million of additional expenses related to growth initiatives in the trailing four quarters. Combined, addressable expenses have been reduced by EUR 185 million compared with the base year 2019, on a constant currency basis. The growth initiatives are aimed at improving customer service, enhancing user experience, and developing new products, and contributed EUR 215 million to the operating result in the trailing four quarters. The company will continue to execute the expense savings and growth initiatives at pace.
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 invests in expanding its customer base and increasing its margins to realize profitable growth.
In the US Individual Solutions business, Transamerica’s aim is to achieve top-5 positions in term life, whole life final expense, and index universal life through profitable sales growth. New life sales in the second quarter of 2022 amounted to USD 106 million, a 12% increase compared with the same period last year, and were driven by increased index universal life and whole life final expense sales. Index universal life growth was driven by the World Financial Group (WFG) distribution channel, which benefited from further structural actions expanding the distribution strength of this channel. These included activating dormant producers and growing the number of licensed life agents by 12% compared to the prior year period, to 58,000. Together with the continued competitiveness of Transamerica’s products, this resulted in a market share of 63% in this channel and marks the best sales quarter for Transamerica products in the WFG channel since the first quarter of 2016. Whole life final expense sales grew due to targeted segmentation efforts on key brokerage relationships and following enhancements made to the product, the application process, and to customer service.
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. Written sales were USD 855 million in the second quarter of 2022, compared with USD 1.1 billion in the same quarter last year. Lower equity markets and higher interest rates have had a negative impact on plan assets, and plan sponsors are more reluctant to move retirement plans given the current volatile markets. Net deposits for the Middle‑Market increased and amounted to USD 467 million in the second quarter of 2022 compared with USD 127 million of net deposits in the same quarter of last year. Net deposits are benefiting from strong written sales in prior periods, which translate into higher recurring deposits. Transamerica continued to grow its suite of workplace financial wellness solutions with the introduction of a new product, the Emergency Savings Account. This product enables employers to help their employees save for unexpected events and improve their financial wellbeing.
Aegon is a leading mortgage originator in the Netherlands, and benefits from its scale, high service levels to intermediaries and customers, and diversified sources of funding. The company originated EUR 2.4 billion of residential mortgages during the quarter. This is lower than the EUR 2.9 billion originated in the second quarter of last year due to reduced refinancing activity as a result of increased mortgage interest rates. In the second quarter of 2022, approximately half of the mortgages were originated for third-party investors, who pay Aegon a fee for originating and servicing these mortgages. Despite the reduction in mortgage origination, the portfolio of mortgages under administration grew by EUR 3.6 billion compared with the second quarter of 2021 to EUR 61.6 billion, also reflecting lower prepayments.
Net deposits for the Workplace Solutions defined contribution pension products (PPI) in the Netherlands decreased by 3% to EUR 191 million in the second quarter of 2022. Higher recurring gross deposits from continued strong demand for PPIs were more than offset by one-time outgoing value transfers. These value transfers are part of an industry-wide plan to consolidate small pensions. Excluding these value transfers, net deposits would have increased by 10% compared with the second quarter of 2021.
Aegon aims to develop its online bank Knab into a digital gateway for individual retirement solutions. In the second quarter of 2022, Knab grew its fee-paying customer base by almost 10,000 to 325,000. This growth was mainly driven by the small business segment, which underscores the bank’s ability to attract and retain customers through its clear way of communicating, its customer-friendly service and the way it offers customers an easy and cost-effective way of managing their banking matters online.
In the United Kingdom, Aegon’s aim is to grow both the Retail and Workplace channels of its platform business. The platform business – excluding the low-margin Institutional business – generated net deposits of GBP 317 million. This compared with GBP 982 million in the second quarter of 2021, largely driven by a large scheme win in the Workplace space. The quarter benefited from improved persistency reflecting enhancements made to the platform’s functionality and investments in providing improved service to intermediaries. Net deposits on the platform contributed positively to revenues, but were more than offset by the revenues lost from the anticipated gradual run-off of the traditional product portfolio. Platform expenses as a percentage of assets under administration remained stable compared with the second quarter of last year at 21 basis points, with expense savings offsetting the impact from market movements on assets under administration.
Recently, Aegon UK moved over GBP 3 billion of customers’ assets into strategies that consider ESG credentials, as part of the commitment to make their default pension funds carbon net-zero by 2050. Aegon has transitioned approximately GBP 15 billion into ESG strategies within its default funds in the last three years. The funds track the newly launched Morningstar ESG Enhanced indices. The new indices target a reduction in carbon emissions intensity and apply a set of exclusionary screens to limit exposure to controversial companies. The securities are then reweighted to favor those with stronger ESG attributes. The methodology aims to maintain risk characteristics in line with standard market benchmarks and manage emerging ESG tail risks.
Financial Assets are blocks of business which are capital intensive with relatively low returns on capital employed. New sales for these blocks are limited and focused on products with higher returns and a moderate risk profile. Dedicated teams are responsible for managing these businesses and maximizing their value through active in-force management, disciplined risk management and capital management actions. To achieve this, Aegon considers 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.
Having made significant progress since the Capital Markets Day in December 2020 on management actions to better manage the variable annuity portfolio, the company is directly engaging with third parties to investigate further options to release capital and improve the risk‑return profile of Transamerica. The outcome of those external engagements, and the trade-offs to be made as part of a potential transaction, will be weighed against the alternative of continued full ownership and active management of a de-risked variable annuity portfolio. As soon as the company has more to share on the outcome of this process, it will update the market.
Previously, Transamerica expanded the dynamic hedge program to variable annuity products with guaranteed minimum death benefits and guaranteed minimum income benefits. In the second quarter of 2022, Transamerica achieved a hedge effectiveness of 98% on its variable annuity dynamic hedge program, continuing its strong track record. Furthermore, Transamerica is taking actions to reduce the basis risk between underlying investment funds and hedge instruments. To this end, enhancements have been made to its hedging program as of the end of June 2022, which further increase the predictability of cash flows from the variable annuity portfolio. As previously announced, in April 2022 Transamerica adopted a long-term implied volatility assumption for the valuation of its variable annuity guarantees, which was higher than the prevailing implied volatility at that time. Previously, spikes in short-term volatility could result in more variability in the RBC ratio. Given that implied volatility tends to revert to the mean over time, the adoption of a long-term volatility assumption will better protect Transamerica’s capital position against short-term market dislocations.
Transamerica is actively managing its long-term care business. The primary management action regarding long-term care is a multi-year rate increase program. In the second quarter of 2022, the company obtained regulatory approvals for additional rate increases worth USD 23 million, bringing the total value of approvals achieved since the start of the program to USD 391 million. The company is on track to achieve the upgraded target of USD 450 million rate increases from this program.
Claims experience for the long-term care business in the second quarter was favorable relative to the company’s long-term expectations due to the impact of the COVID-19 pandemic. Actual to expected claims experience was 75% for the second quarter of 2022, and reflected the release of the remaining USD 18 million 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 second quarter of 2022 would have amounted to 88%. This is mainly due to higher than expected claims terminations, while the number of new claims returned to pre-pandemic levels.
The dedicated team responsible for the Dutch Life business – Aegon Levensverzekering N.V. – is actively managing risks and the capital position to enhance the consistency of remittances to the Group. The Solvency II ratio of the Dutch Life business increased during the second quarter of 2022 from 186% to 200% driven by model updates and the sale of fixed income investments to protect the liquidity position in the context of rising interest rates. The ratio stands above the operating level of 150%. In May 2022, the company updated its interest rate hedging program to reduce the sensitivity of the ratio to steepening of the interest rate curve at the longer end.
Growth Markets and Asset Management
In its growth markets – Spain & Portugal, Brazil, and China – Aegon is investing in profitable growth. New life sales from these markets increased by 5% to EUR 55 million due to sales growth in the bancassurance channel in Spain.
Market consistent value of new business (MCVNB) for life business decreased slightly to EUR 16 million driven by a less favorable product mix in Spain, which was partially offset by more favorable economic conditions.
New premium production for property & casualty and accident & health insurance increased by 8% compared with the second quarter of 2021 to EUR 31 million driven by the continued demand for household insurance products in Spain & Portugal.
On May 23, 2022, Aegon announced its decision to sell its 50% stake in the Spanish insurance joint venture with Liberbank to Unicaja Banco. The sale followed the change of control in Liberbank after its merger with Unicaja Banco in 2021. The gross proceeds of the transaction amount to EUR 177 million, representing 22 times 2021 operating result after tax of Aegon’s 50% stake in the joint venture. Aegon Spain intends to upstream the net proceeds to the Group. The transaction is expected to close in the second half of 2022, subject to regulatory approval. Aegon will continue to grow its business in Spain & Portugal through its key life and non-life joint ventures with Banco Santander as well as through its own channels, which have generated significant profitable growth over the last years.
Aegon Asset Management (Aegon AM) aims to significantly increase the operating margin of its Global Platforms by improving efficiency and driving growth. Third-party net outflows on the Global Platforms amounted to EUR 0.8 billion in the second quarter of 2022. Continued net deposits into the Dutch mortgage fund were more than offset by outflows in fiduciary management and in other asset classes, including structured assets, as customers freed up liquidity in a rising interest rate environment and because of challenging market conditions. Third-party net deposits in Strategic Partnerships of EUR 1.1 billion more than offset the third-party outflows in Global Platforms, leading to net third-party net deposits of EUR 0.3 billion for Aegon AM overall. This builds on Aegon’s track record of more than ten consecutive years of positive third-party net deposits and reflects the strength of Aegon’s investment capabilities. Annualized revenues lost on net deposits for Global Platforms amounted to EUR 8 million for the quarter as a result of net outflows in the general account, affiliates and third-party business. The operating margin reduced from 13.6% in the second quarter of 2021 to 11.8%. On a constant currency basis, expense reductions were more than offset by the impact of adverse market conditions on management fees and lower other revenues as a result of lower origination and disposition fees on the real assets platform.
Earlier this year, Aegon AM entered into a four-year equity venture with Taurus, a global private equity real estate firm, to acquire USD 600 million in multifamily assets, and to considerably reduce the energy consumption and carbon output of those assets. This venture leverages Taurus and Aegon AM's track record of executing multifamily value-add investment strategies and is part of Aegon AM’s continuous focus on responsible investments. In the second quarter, an initial investment was made to turn an apartment complex located in Orlando, Florida into a low-carbon, energy efficient building.
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 April 21, 2022, Aegon announced the completion of the divestment of its business in Turkey to VIG. The gross proceeds of the transaction amounted to EUR 80 million. The completion of the sale of the Turkish business marks another step towards the full closing of the sale of Aegon's insurance, pension, and asset management businesses in Central and Eastern Europe to VIG for EUR 830 million, as announced in November 2020. Aegon already announced the completion of the divestment of Aegon’s Hungarian businesses to VIG on March 23, 2022 for EUR 620 million gross proceeds. The divestment of Aegon’s businesses in Poland and Romania is expected to be completed in the course of 2022, subject to required local regulatory approvals.
Strengthening the balance sheet
Aegon’s capital management policy has three pillars: Cash Capital at the Holding, gross financial leverage, and capital positions of the country units. Each country unit has a minimum dividend payment level and an operating level. Each country units is expected to remit capital to the Holding as long as its capital ratio is above the minimum dividend payment level, subject to normal governance. Aegon will manage the capital position of its units to the operating level over-the-cycle. Each unit maintains a dynamic list of potential management actions to manage the capital position and maintain a strong solvency ratio. An example of such a management action is the update made to the valuation of Index Universal Life reserves in the United States in the second quarter of 2022. This was possible thanks to a multi-year model enhancement program, and had a significant positive impact on Transamerica's RBC ratio.
Operating result decreased by 4% compared with the second quarter of 2021 to EUR 538 million. Lower fees due to adverse market movements, expected outflows in US Variable Annuities, and lower investment income in the Netherlands more than offset the benefits from expense savings, growth initiatives, favorable claims experience and the strengthening of the US dollar.
The operating result from the Americas decreased from EUR 283 million in the second quarter of 2021 to EUR 236 million in the second quarter of 2022. This was primarily due to a lower result from US Variable Annuities impacted by market movements and expected outflows. The mortality claims experience was EUR 5 million favorable for the quarter, compared with unfavorable experience of EUR 27 million in the second quarter of 2021. Morbidity experience for the quarter was also favorable at EUR 27 million, although reduced from the favorable experience in last year’s second quarter of EUR 55 million.
Aegon’s operating result in the Netherlands increased by EUR 6 million compared with the second quarter of 2021 to EUR 191 million. The result of Workplace Solutions increased – driven by provision releases in the non-life business – and more than offset the impact of lower investment income on the results of Life and Bank. Benefits from expense savings initiatives were more than offset by higher expenses for growth initiatives and higher pension cost for own employees.
The operating result from the United Kingdom increased by 27% compared with the second quarter of 2021 to EUR 56 million. The result benefited from a one-time increase in fee income net of hedging, as well as other non-recurring elements, including favorable mortality experience. Lower addressable expenses as a result of expense savings also contributed favorably. Together, these more than offset the loss of earnings from the run-off of the traditional product portfolio.
The operating result from International increased by 72% to EUR 57 million in the second quarter of 2022. The increase largely reflects the benefits from business growth in Spain & Portugal, Brazil and China, and better claims experience compared with the same period last year.
The operating result from Aegon AM decreased by 31% compared with the second quarter of 2021 to EUR 49 million. This was mainly the result of lower performance fees in the Chinese joint venture AIFMC compared with last year’s exceptional level. The operating result for Global Platforms also declined, as a result of the impact of adverse market conditions on management fees, and lower other revenues.
The operating result from the Holding was a loss of EUR 51 million, and mainly reflects funding expenses.
The result from non-operating items amounted to a loss of EUR 450 million in the second quarter of 2022 as a result of fair value losses and realized losses on investments. Fair value losses were mainly driven by the United States, largely due to the dynamic hedge program for US variable annuities with GMDB and GMIB riders. This program targets to hedge the economic liability. However, under IFRS reporting, discount rates for liabilities are locked-in, which led to an accounting mismatch and resulted in a fair value loss from the increase in interest rates during the quarter. There was a partial offset from the Netherlands, driven by the positive impact from rising credit spreads, that led to a lower fair value of liabilities. Realized losses on investments were driven by the Americas and the Netherlands, and reflect the sale of bonds to protect the liquidity position in the context of rising interest.
Other charges amounted to EUR 522 million and primarily resulted from various actuarial assumption updates, and charges from reinsurance rate increases in the Americas. Other drivers included a book loss on the sale of Aegon’s business in Turkey, and one-time investments related to the operational improvement plan, which amounted to EUR 69 million.
The result before tax amounted to a loss of EUR 435 million. After a tax benefit of EUR 87 million, the net result was a loss of EUR 348 million.
Addressable expenses of EUR 748 million remained stable on a constant currency basis compared with the second quarter of 2021. Additional investments in growth initiatives across the group, an acquisition and timing elements in the Americas, and higher pension cost for own employees in the Netherlands offset the benefit from expense savings initiatives.
Operating expenses of EUR 954 million decreased by 1% compared with the second quarter of 2021. Lower one-time investments in the operational improvement plan and the impact of the completion of the sale of Aegon’s businesses in Hungary and Turkey more than offset adverse currency movements.
On June 30, 2022, shareholders’ equity excluding revaluation reserves equaled EUR 19.6 billion, or EUR 9.55 per common share. The EUR 0.5 billion increase compared with March 31, 2022 mainly came from the favorable impact of higher interest rates on the remeasurement of the defined benefit obligations, and favorable currency movements.
Gross financial leverage
Gross financial leverage decreased by EUR 0.3 billion in the second quarter of 2022, leading to gross financial leverage of EUR 5.7 billion per June 30, 2022. A debt tender offer was successfully completed on April 5, 2022, which reduced Aegon’s gross financial leverage by EUR 429 million. This decrease was partly offset by the strengthening of the US dollar against the euro. After completion of the tender offer, Aegon has reduced its gross financial leverage to within the range of EUR 5.0 billion to EUR 5.5 billion based on a euro/US dollar exchange rate of 1.20, a target that was set to be accomplished by 2023.
Cash Capital at Holding and free cash flow
Aegon’s Cash Capital at the Holding decreased from EUR 1,817 million to EUR 1,680 million during the second quarter of 2022. This was largely due to the previously announced deleveraging – which led to a cash outflow of EUR 408 million – and the first EUR 100 million tranche of Aegon’s EUR 300 million share buyback program that was executed in the second quarter of 2022. This was partly offset by free cash flow of EUR 318 million and the proceeds from divestitures of EUR 88 million, which mainly related to the completion of the sale of Aegon’s business in Turkey. Other items added up to EUR 35 million cash outflow and were driven by hedge expenses and capital injections into smaller units.
On March 23, 2022, Aegon announced its intention to return surplus cash capital to its shareholders via a EUR 300 million share buyback, barring unforeseen circumstances. The share buyback is being executed in three tranches of EUR 100 million each, with each tranche conditional on maintaining the capital positions of Aegon's main units in line with their stated ambitions, and the Cash Capital at the Holding being above the middle of the operating range. The second tranche of EUR 100 million is expected to be completed on or before September 30, 2022. Aegon announces today that the third tranche will commence on October 3, 2022 and is expected to be completed on or before December 15, 2022.
Aegon's Group Solvency II ratio increased from 210% to 214% during the second quarter of 2022, as capital generation after holding expenses of EUR 156 million, the sale of Aegon’s business in Turkey, and favorable currency movements were only partly offset by the impact of the 2022 interim dividend. Unfavorable market movements totaled EUR 624 million, largely due to lower equity markets in the United States. One-time items amounted to a benefit of EUR 456 million and were driven by management actions in the United States and the Netherlands. Operating capital generation amounted to EUR 324 million after holding expenses, reflecting overall favorable claims experience. The operating capital generation in the second quarter does not reflect the impact from the reinsurance rate increases in the US. The new rates will apply as of next year, reducing the annual operating capital generation by around EUR 40 million in 2023, and will gradually decrease in the years thereafter in line with the run-off of the portfolio.
The estimated RBC ratio in the United States decreased from 424% on March 31, 2022 to 416% on June 30, 2022, and remains above the operating level of 400%. The RBC ratio was negatively impacted by market movements, largely due to unfavorable equity markets. Furthermore, the previously announced adoption of a long-term implied volatility assumption in April 2022 reduced the RBC ratio by 4 percentage points in line with expectations. These items were partially offset by management actions, mostly from updates to the modelling of Index Universal Life reserves, which was possible due to a multi-year model enhancement program. The recapturing of liabilities from a captive reinsurance company had an unfavorable impact on the ratio. Operating capital generation contributed favorably, and broadly offset the remittances to the Group.
The estimated Solvency II ratio of NL Life increased from 186% on March 31, 2022 to 200% on June 30, 2022, and remains above the operating level of 150%. The increase was mainly due to lower capital requirements, including from the sale of fixed income investments to protect the liquidity position in the context of rising interest rates. A model update to reflect more granular asset modeling contributed favorably as well. Market movements had a neutral impact, as the negative impact from higher spreads was offset by a positive impact from other market movements, mainly due to the significant rise of interest rates. Operating capital generation more than offset the EUR 50 million remittance to the Group in the second quarter.
The estimated Solvency II ratio for Scottish Equitable Plc increased from 177% on March 31, 2022 to 178% on June 30, 2022, and remained above the operating level of 150%. The increase of the ratio was mostly due to operating capital generation and a reduction in required capital as a result of market movements. These more than offset the impact of remittances to the holding company.
2022 interim dividend
Aegon aims to pay out a sustainable dividend to allow equity investors to participate in the company’s performance, which can grow over time if Aegon’s performance so allows. Aegon targets a dividend per common share of around EUR 0.25 over 2023. At its 2020 Capital Markets Day, Aegon guided for muted near-term dividend growth. Since then, Aegon has made steady progress on its strategic priorities and financial targets. As a result, Aegon announces today an interim dividend for 2022 of EUR 0.11 per common share, which represents an increase of EUR 0.03 compared with the interim dividend for 2021.
The interim dividend will be paid in cash or in shares at the election of the shareholder. The value of the dividend to be paid in shares will be approximately equal to the dividend to be paid in cash. Aegon intends to neutralize the dilutive effect of the 2022 interim dividend to be paid in shares in the fourth quarter of this year, barring unforeseen circumstances.
Aegon’s shares will be quoted ex-dividend on August 23, 2022. The record date is August 24, 2022. The election period for shareholders will run from August 25 up to and including September 14, 2022. The stock fraction will be based on the average share price on Euronext Amsterdam, using the high and low of each of the five trading days from September 8 through September 14, 2022. The stock dividend ratio will be announced on Aegon’s website on September 14, 2022 after business hours. The dividend will be payable as of September 21, 2022.
Since the Capital Markets Day in 2020, Aegon has strengthened its capital position. Gross financial leverage has been reduced to within the targeted range of EUR 5.0 billion to EUR 5.5 billion based on a euro/US dollar exchange rate of 1.20, a target that was set to be accomplished by 2023. Furthermore, Aegon has significantly reduced the affiliate note balance in the US, and reduced its exposure to financial market risk. Throughout its transformation journey, Aegon has maintained the capital position of its three main units around or above their respective operating levels, despite market volatility. This has allowed Aegon to sustainably grow its free cash flow.
Considering the active management of the balance sheet and the overall transformation progress, Aegon is comfortable increasing its expectation for cumulative free cash flow over the period 2021 to 2023 to at least EUR 2.2 billion – barring unforeseen circumstances – of which approximately one third in 2022. This is well ahead of the target of EUR 1.4 billion to EUR 1.6 billion provided at the 2020 Capital Markets Day. The free cash flow outlook is supported by operating capital generation from the units. Following the strong performance in 2022 year to date, Aegon increases its outlook for operating capital generation before holding funding and operating expenses to around EUR 1.4 billion, barring unforeseen circumstances. This compares to the guidance of around EUR 1.2 billion that was provided at the fourth quarter 2021 results.
Selection of new independent auditor
Aegon’s Supervisory Board will propose to appoint Ernst & Young Accountants LLP as the company’s independent auditor for the Annual Accounts 2024 through 2028, during the upcoming Annual General Meeting of Shareholders on May 25, 2023. This recommendation is the result of a rigorous tender process that Aegon conducted, in line with industry best practice and consistent with its sound corporate governance principles.