From the Brexit referendum in the UK to the presidential election in the United States, 2016 was a year defined by a series of events that had profound effects on the global economy. Uncertainty and instability led to considerable volatility on financial markets, interest rates decreased to historically low levels before rising later in the year, and the trend of governments retreating from providing retirement security continued.
Strong sales
2016 was once again a year of strong sales – especially in terms of our fee businesses, in particular Asset Management. We reached over EUR 100 billion of gross deposits for the very first time, which contributed to EUR 3 billion net deposits.
This strong performance was above all a reflection of the need and relevance of our products and services, the strength of our franchise, and the trust our loyal customers continue to place in us.
Financial performance
Aegon's net income in 2016 improved to EUR 586 million compared with a loss of EUR 523 million in 2015. Underlying earnings before tax increased 2% compared with 2015 to EUR 1,913 million, primarily as a result of higher underlying earnings before tax from the United Kingdom.
The net result in 2016 was impacted by a loss of EUR 645 million on fair value items, which was driven by accounting losses on hedging programs and underperformance of alternative investments.
Realized gains of EUR 340 million in 2016 mainly related to normal trading in the investment portfolio.
Other charges amounted to EUR 771 million in 2016, mainly driven by the EUR 682 million book loss on the divestment of our annuity portfolio in the United Kingdom.
Financial targets
While we experienced some significant headwinds this year in the form of market volatility and some adverse claims experience – both of which had an impact on earnings – we are on track to deliver on our 2018 financial targets.
We successfully increased capital returns to our shareholders this year as part of our commitment to return EUR 2.1 billion to shareholders in the period 2016-2018.
Solvency II
Aegon's Solvency II ratio, which measures our risk, remained well within our target range of 140 to 170 percent throughout the year – despite the widespread economic volatility. The ratio on December 31, 2016, of 157 percent was above the midpoint of our target range, and this consistent performance throughout the year is a demonstration of our company's diligent approach to managing risk and protecting our balance sheet.
There is nonetheless potential for renewed volatility and uncertainty around the calculation of this ratio, and we remain mindful and focused on such risks.
Digital transformation
Once again, we invested significantly in developing innovative digital solutions – from new apps and customer-friendly platforms that enable people to better understand their finances, to exploring the future of the insurance industry through co-launching the Blockchain Initiative B3i.
The environment in which we operate is changing fast, and over the course of the year we continued to demonstrate how we are adapting to the new landscape. In the UK, we divested our annuity book and acquired Cofunds and BlackRock's defined contribution recordkeeping business. This successfully completed the transformation of our UK business from a largely traditional pension business into a market-leading, cost efficient and scalable platform business, with over 3 million customers and approximately 100 billion pounds of assets under administration.
Restructuring of our U.S. operations
We also continued the very significant restructuring of our U.S. business, which has brought all of Transamerica's business units together into a single, customer-facing company, and gives our customers easier access to all our different products and services.
By transforming Aegon's U.S. operations from distinct business lines into one, functionally-organized business, we identified potential for cost savings. These savings constituted the bulk of the group's original 2018 expense savings target of EUR 200 million, announced in January 2016.
Meeting these expense reductions was a key priority for our business throughout the year as we continued to focus on becoming more efficient, more profitable, raising our returns, investing in new digital solutions, and deploying our capital in the best way for our company and stakeholders.
Reducing expenses
By accelerating the execution of our strategy, we were able to exceed our expense savings target for the year, achieving a total of EUR 110 million in run-rate savings. As a result, this enabled us to announce that our group 2018 run-rate expense savings target would rise to EUR 350 million.
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