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Aegon delivers higher underlying earnings, sales and value of new business

The Hague, November 7, 2013

"Our actions this quarter allow us to operate our business and serve our customers more effectively while maintaining the strength of our company in the long-term."

Net income impacted by changes to economic assumptions

Solid growth in underlying earnings before tax

  • Underlying earnings up 7%, driven by business growth, higher equity markets, favorable mortality and actuarial assumption updates, and partly offset by unfavorable currency exchange rates
  • Fair value items loss of EUR 493 million, mainly as a result of aligning economic assumptions related to interest rates, bond fund and equity market returns with current market conditions
  • Net income amounts to EUR 227 million, mainly impacted by fair value losses
  • Return on equity amounts to 9.9% as a result of higher underlying earnings and one-time tax benefits

Sales growth mainly driven by higher variable annuity and pension deposits

  • New life sales increase 2% to EUR 412 million, driven by pension sales in the UK
  • Gross deposits up 17% to EUR 11.0 billion, driven by variable annuities and pensions in US
  • Net deposits, excluding run-off businesses, more than double to EUR 3.4 billion
  • Accident & health sales decrease 12% to EUR 167 million due to the termination of certain distribution partnerships earlier this year and unfavorable currency exchange rates

ŸMarket consistent value of new business increases significantly to EUR 285 million, as a result of higher interest rates, increased sales volumes and management actions to improve margins

Capital position remains strong; cash flows compressed by one-time items

  • Solvency ratio of 208%, reflecting move to swap curve for Dutch solvency calculation
  • Holding excess capital at EUR 1.8 billion
  • Operational free cash flows of EUR 88 million, impacted by market movements and one-time items

Statement of Alex Wynaendts, CEO

“A further increase in underlying earnings and sales this quarter, and a sharp rise in the value of new business, were primarily the result of management actions and favorable market conditions. Net income was impacted, mainly by Aegon’s decision to bring economic assumptions for interest rates and equity markets in line with market conditions. Aegon also maintained its strong capital position this quarter, a key element of our long-term strategy.

“We accelerated the expansion of our digital distribution capabilities, reflecting our strategic focus on innovation at all levels of our company to connect more effectively with our customers in whatever ways they choose. Notable initiatives included the launch of direct-to-consumer propositions in Spain and Central & Eastern Europe – we also reached more than GBP 1 billion in assets on our new innovative retirement platform in the United Kingdom, which launched just one year ago.

“Our actions this quarter allow us to operate our business and serve our customers more effectively while maintaining the strength of our company in the long-term. Looking ahead, we are confident that the continued execution of our strategy and our strong capital position fully support our ambition to become a leader in each of our chosen markets.”

Please view the table Key performance indicators (for notes see page 22 of the full version).

STRATEGIC HIGHLIGHTS

  • Additional steps taken to improve efficiency in the Americas and the holding
  • Aegon Direct propositions launched in Spain, trials commence in several CEE countries
  • Aegon Retirement Choices (ARC) platform in the UK surpasses GBP 1 billion in assets

Aegon’s ambition
Aegon continues to pursue its strategic aim to be a leader in all of its chosen markets, supported by four strategic objectives embedded in all Aegon businesses: Optimize portfolio; Deliver operational excellence; Enhance customer loyalty; and Empower employees. These provide the strategic framework for the company’s ambition to become the most-recommended life insurance and pension provider by customers and business partners, as well as the most-preferred employer in the sector.

Optimize portfolio
Aegon is introducing variable annuity products and expertise to the German market. This builds on Aegon’s experience and best practices gained elsewhere in the group, including the United States, where variable annuities are a significant business.

Aegon continually reviews each of its businesses for strategic fit and return prospects, and, as part of this review, announced the sale of its Czech pension business this quarter. Exiting the pension business allows Aegon to focus more on the growing life insurance market in the Czech Republic which better aligns with Aegon’s desired risk profile and return requirements.

The Aegon Retirement Choices (ARC) platform in the UK continues to draw praise, recently winning ‘Best new platform’ and ‘Best use of platform technology’ at the Aberdeen UK Platform awards. The platform has achieved unprecedented growth, now exceeding GBP 1 billion of assets under administration.

Deliver operational excellence
Aegon’s continued focus on cost efficiency is evident with the implementation of operational improvements in the Americas and at the holding. The operational improvements at the holding were initiated in October and are aimed at improving the service to stakeholders, while reducing expenses. In the Americas, Aegon has begun to execute on a restructuring program aimed at creating a broad range of synergies. A first important step was taken toward this objective with the creation of a new division, Enterprise Business Services (EBS) - a shared services group which has as its primary purpose to bring together common back office functions and processes. This will enable the core businesses to focus on delivering a quality customer experience, achieving their strategic priorities, and developing innovative solutions, in addition to generating considerable cost reductions.  Moreover, EBS has also identified opportunities to source certain professional functions that support Aegon’s businesses to external providers who are able to deliver those same services at a lower cost.

Enhance customer loyalty
Aegon believes that creating a customer-centric culture will enable it to grow further by responding to changing markets and customer behaviors. A key element of Aegon's strategy is to get closer to its customers by increased deployment of technology at all levels of the organization. The Aegon Direct initiative was launched in Spain this quarter, and began trials in several Central & Eastern European (CEE) countries. Aegon Direct allows clients to research, obtain a quote for, and purchase insurance products online.

Recent survey results from the Hungarian Financial Supervisory Authority show that Aegon clients are the country’s most satisfied bank and insurance clients. This follows a concerted two-year effort to actively address customer complaints and adjust products based on customer feedback.

The Transamerica Center for Retirement Studies (TCRS) celebrated its 10-year anniversary by expanding to create the Transamerica Institute, including the new Transamerica Center for Health Studies. TCRS helps people, employers and policymakers to better understand retirement. The expansion aims to bring more clarity to navigating the financial implications of health coverage decisions in the United States.

Empower employees
Aegon continues to implement initiatives to help employees better understand how they contribute to Aegon’s strategy. In Spain, Aegon has launched the ‘Customer Voices’ program that appoints employees to be the customer voice or advocate in the organization. An early result of this program has been an improved client welcome process which now includes a personal letter and welcome phone call and a follow-up package with further information about the company.

In the United States, hundreds of Transamerica’s employees from across the country participated in the Healthy 4.01k walk. Sponsored by Transamerica’s Employer Solutions & Pensions division, this program reminded employees to walk the talk for retirement readiness. Aegon believes this initiative, and others similar to it, will help its employees better relate to customers, increasing customer brand loyalty and strengthening its market position.

Use this link for the table Financial overview and Revenue-generating investments.

OPERATIONAL HIGHLIGHTS

Underlying earnings before tax
Aegon’s underlying earnings before tax in the third quarter of 2013 increased 7% to EUR 531 million compared to the third quarter of 2012. Business growth, the positive effects of favorable equity markets (EUR 33 million and favorable mortality in the Americas (EUR 15 million), more than offset the loss of earnings due to the sale of the company’s interests in partnerships in Spain and Asset Management (EUR 12 million) and the impact of unfavorable currency exchange rates (EUR 23 million). In addition, actuarial assumption updates and model refinements amounted to EUR 27 million in the third quarter of 2013.

Underlying earnings from the Americas increased 2% compared to the third quarter of 2012 to EUR 371 million. This was mainly due to growth in Variable Annuities and Pensions, favorable mortality experience of EUR 15 million in Life & Protection, and a positive impact of EUR 5 million of actuarial assumption changes and model refinements. These gains were partly offset by unfavorable currency exchange rates.

In the Netherlands, underlying earnings were stable at EUR 85 million as an earnings recovery in Non-life and higher earnings in Pensions were offset by lower Life & Savings earnings due to the non-recurrence of a provision release of EUR 8 million booked in the third quarter of 2012.

Underlying earnings from Aegon’s operations in the United Kingdom amounted to EUR 26 million in the third quarter of 2013. The positive impact of higher equity markets was more than offset by investments in technology, adverse persistency of EUR 5 million, and unfavorable mortality experience and currency exchange rates. The effects of adverse persistency are expected to continue into the fourth quarter of 2013.

Underlying earnings from New Markets increased 6% to EUR 74 million, mainly due to the positive impact of actuarial assumption changes and model refinements of EUR 22 million in Asia in the third quarter of 2013, compared to EUR 7 million in the third quarter of 2012. Results in Spain were impacted by EUR 9 million as a result of the divestments of the joint ventures with Banca Cívica and Unnim, while earnings from Asset Management were impacted by EUR 3 million due to the divestment of hedge fund manager Prisma.

Total holding costs decreased 50% to EUR 25 million, mainly as a result of lower net interest costs following debt redemptions and lower operating expenses.

Net income
Net income decreased 40% to EUR 227 million as higher losses from fair value items were only partly offset by higher underlying earnings, increased realized gains and tax benefits.

Fair value items
The results from fair value items amounted to a loss of EUR 493 million. The loss was mainly driven by long-term economic assumption changes totaling EUR 405 million. Aegon reduced its annual equity market total return assumption from 9% to 8%, accounting for approximately EUR 135 million of the total. In addition, the long-term assumption for 10-year US Treasury yields was lowered by 50 basis points to 4.25%, while the grading period towards the long-term assumption was increased from 5 to 10 years for both the 10-year US Treasury yield assumption and the return assumption for separate account bond funds. The separate account bond funds return assumption is now set at 4% for 10 years, and 6% thereafter. These interest rate related adjustments accounted for approximately EUR 270 million of the total.

The loss on fair value hedges without an accounting match under IFRS was EUR 116 million. This was mainly driven by the macro hedge in the Americas, on which the loss was EUR 95 million, as a result of the strong equity market performance in the third quarter of 2013. For similar reasons, the loss on the equity collar hedge was EUR 36 million.

Fair value hedging with an accounting match, which include the hedges on Aegon’s GMWB variable annuities block and the guarantees on general account products in the Netherlands, contributed EUR 31 million to earnings. Fair value investments outperformed by EUR 13 million, mainly driven by credit derivatives.

Realized gains on investments
In the third quarter, realized gains on investments increased 58% to EUR 202 million and were the result of adjustments to the asset mix in the investment portfolio in the Netherlands to bring it in line with the new regulatory yield curve, as well as normal trading activity.

Impairment charges
Impairments were up compared to last year and amounted to EUR 45 million. These largely related to impairments on structured assets in the Americas and a single corporate exposure in the United Kingdom, as well as residential mortgage loans in the Netherlands and Hungary.

Other income
Other income amounted to a loss of EUR 42 million. The negative impact of the intangibles write off related to the Polish pension fund business of EUR 182 million and restructuring charges in the Americas of EUR 27 million, were partly offset by a gain of EUR 74 million on the sale of the joint venture with CAM and a gain on the recapture of certain reinsurance contracts in the Americas of EUR 126 million.

Run-off businesses
The results of run-off businesses declined to EUR 1 million, mainly driven by lower spreads and unfavorable mortality in payout annuities.

Income tax
Income tax amounted to a benefit of EUR 73 million in the third quarter. The effective tax rate on underlying earnings for the third quarter of 2013 was 7%, mainly driven by a benefit in the United Kingdom from a reduction in the corporate tax rate from 23% to 20%.

Return on equity
Return on equity increased to 9.9% for the third quarter of 2013, driven by higher net underlying earnings, which included a one-time tax benefit in the United Kingdom. Return on equity for Aegon’s ongoing businesses, excluding the run-off businesses, amounted to 10.9% over the same period.

Operating expenses
In the third quarter, operating expenses increased 7% to EUR 830 million mainly due to the non-recurrence of a benefit plan release recorded in the third quarter of 2012, restructuring expenses in the Americas and higher variable annuities sales and employee performance related expenses related to the growth of the business in the Americas. On a comparable basis, operating expenses increased 4%. Approximately half of this increase was driven by additional investments in technology to support future growth, with the remainder mainly the result of the growth of the business in the Americas.

Sales
Compared to the third quarter of 2012, Aegon’s total sales increased 9% to EUR 1.7 billion. New life sales were up by 2%, driven mainly by higher pension production in the United Kingdom, partly offset by unfavorable currency movements. In the Americas, new life sales were down 8%, primarily driven by adverse currency movements, as well as lower universal life sales due to product withdrawals and product redesign, resulting from the focus on value creation. Gross deposits increased 17%, with particular success in both the variable annuity and retirement business in the United States, partly offset by unfavorable currency movements. Net deposits, excluding run-off businesses, more than doubled to EUR 3.4 billion and were primarily driven by variable annuity and retirement deposits in the United States.

Market consistent value of new business
The market consistent value of new business increased strongly to EUR 285 million mainly as a result of strong sales growth and higher margins in the United States and a higher contribution from mortgage production in the Netherlands.

Revenue-generating investments
Revenue-generating investments increased 1% during the third quarter of 2013 to EUR 469 billion, driven by continued net inflows and higher equity markets, partly offset by unfavorable currency exchange rates.

Capital management
Shareholders’ equity decreased EUR 0.8 billion compared to the end of the second quarter of 2013 to EUR 20.3 billion at September 30, 2013. This was driven by unfavorable currency exchange rates and higher interest rates, resulting in lower revaluation reserves. The revaluation reserves declined by EUR 0.4 billion to EUR 3.4 billion. Aegon’s shareholders’ equity, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 17.8 billion. The gross leverage ratio improved to 30.1% in the third quarter, as outstanding commercial paper was reduced by EUR 0.2 billion. Excess capital in the holding decreased to EUR 1.8 billion, as proceeds of EUR 0.4 billion received from the divestment of the joint venture with CAM were more than offset by the payment of the interim dividend of EUR 0.2 billion, a net capital injection into Aegon’s operating units of EUR 0.2 billion and interest payments and operating expenses.

Shareholders’ equity per common share, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 8.42 at September 30, 2013.

At September 30, 2013, Aegon’s Insurance Group Directive (IGD) ratio decreased to 208%, driven by the switch to the swap curve for regulatory solvency calculations in the Netherlands and the payment of the 2013 interim dividend. The capital in excess of the S&P AA threshold in the United States increased by USD 0.1 billion to USD 0.9 billion, as earnings for the quarter were largely offset by additional tax charges. The IGD ratio, excluding Aegon Bank, in the Netherlands was flat at ~245%. The Pillar I ratio in the United Kingdom, including the with-profit fund, was ~140% at the end of the third quarter of 2013. This was up from ~130% at the end of the second quarter of 2013, mainly reflecting EUR 0.2 billion of capital received from the holding. As of this quarter, Aegon includes the with-profit fund in the reported Pillar I ratio, which is in line with the regulatory requirements in the United Kingdom.

On October 18, 2013, the Dutch Ministry of Finance shared the results of the impact study for Solvency 1.5 and started a consultation process on the final calibrations. Aegon does not expect Solvency 1.5 to have an impact on its capital policy.

On October 15, 2013, Aegon completed the share buyback program announced on September 17, 2013, to neutralize the dilutive effect of the 2013 interim dividend paid in shares. Between September 17, 2013, and October 14, 2013, 19,047,358 common shares were repurchased under the share buyback program, at an average price of EUR 5.62 per share.

Cash flows
Operational free cash flows13) were EUR 88 million in the third quarter of 2013. Excluding one-time items of EUR 112) million and market impacts of EUR (91) million, operational free cash flows amounted to EUR 291 million. The one-items were primarily related to changes to regulatory requirements and tax charges. The impact of market movements during the third quarter mainly resulted from lower credit spreads in the United Kingdom and the tax impact of hedge losses in the Americas.

Aegon did not receive material dividends from its operating units during the third quarter of 2013.

Aegon

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