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Aegon improves earnings, sales and capital position

The Hague, November 11, 2010

During the third quarter Aegon achieved significantly improved year-over-year results, as measured by increases in underlying earnings, net income, new life sales and deposits.

Increase in underlying earnings and net income

  • Underlying earnings before tax increase by 21% to EUR 473 million
  • Net income improves significantly to EUR 657 million, driven mainly by underlying earnings, fair value items and lower impairments
  • Return on equity improves to 10.0%

Increase in sales and deposits

  • New life sales up 7% to EUR 527 million, driven by increased sales in US, UK and New Markets
  • Gross deposits up 38% to EUR 9.4 billion as a result of strong third-party asset management inflows
  • Value of new business declines to EUR 120 million, mainly due to a change in business mix

Continued strong capital position

  • Excess capital above S&P’s AA capital adequacy requirements increases to EUR 3.3 billion; earnings contribution and capital preservation measures were offset by repayment of EUR 0.5 billion to Dutch State
  • IGDa) solvency ratio of 205%

Statement of Alex Wynaendts, CEO
"During the third quarter Aegon achieved significantly improved year-over-year results, as measured by increases in underlying earnings, net income, new life sales and deposits. The strong earnings performance during the quarter was driven by growth across most businesses, strict cost control, higher equity markets and the strengthening of the US dollar against the euro. The quarter, however, also included the negative impact of changes in assumptions relating to customer behavior in our variable annuity business in the United States.

"Aegon’s continued strong franchise resulted in the increase in new life sales within nearly all country units, while our asset management business was the main driver of the significant increase in deposits. Aegon’s excess capital position improved to EUR 3.3 billion, after repaying an additional EUR 500 million to the Dutch State in August. We reaffirm our aim to complete full repayment by the end of June 2011, market conditions permitting.

"During the quarter, we made further progress in restructuring our business in the United Kingdom. We are similarly on track with our plans for Aegon’s life reinsurance business and will communicate further on the progress in due course.

"Overall, Aegon’s businesses performed well during the third quarter and are on track to deliver the benefits of our strategic priorities."

Please view the table Key performance indicators (pdf-245Kb) (for notes see page 19 of the full version (pdf-309Kb)).

STRATEGIC HIGHLIGHTS

  • First steps taken in restructuring UK business in order to achieve targeted cost reduction
  • European Commission approves 2008 Dutch State support

Aegon’s ambition is to become a leader in all its chosen markets by 2015. This means becoming the most recommended life and pensions provider among customers, the preferred partner among distributors and the employer of choice among both current and prospective employees.

Achieving this ambition is based on three strategic priorities: to reallocate capital to areas that offer strong growth prospects and higher returns, to increase returns from the company’s existing businesses and to optimize ONE Aegon by increasing efficiency and making better use of the company’s global resources.

Aegon's AMBITION

To be a leader in all our chosen markets by 2015.

Aegon’S STRATEGIC PRIORITIES

  • Reallocate capital
  • Increase returns
  • Optimize ONE Aegon

…resulting in sustainable, profitable growth.

Reallocate capital

Aegon has taken steps to sharpen its focus on the company’s three core businesses: life insurance, pensions and asset management. Aegon also intends to achieve a greater geographical balance by reallocating capital to the growth markets of Central & Eastern Europe, Asia and Latin America. As part of this approach, Aegon continuously assesses its businesses to ensure they meet the company’s requirements in terms of earnings growth, cash flow generation, return on capital and customer life cycle needs. Currently, Aegon is in the process of exploring strategic options for Transamerica Reinsurance, the company’s international life reinsurance activities, including finding a suitable buyer. At this stage, Aegon is not in a position to provide further details.

Improve risk profile
Aegon has recently further increased equity hedging on its GMIB back-book of variable annuities in the United States by extending its current macro equity hedge program. As a result, Aegon has now covered approximately 80% of the equity exposure from its back-book of GMIB variable annuity guarantees. The company expects to fully equity hedge this back-book by the end of 2012.

Increase returns
In all of its businesses worldwide, Aegon’s aim is to increase returns by increasing efficiency and delivering operational excellence. This will be achieved by further reducing costs while investing in core capabilities and improving service levels to ensure continued customer loyalty.

In the United Kingdom, Aegon is taking significant steps to improve its return on capital. Aegon is targeting to reduce cost by 25% in its UK life and pensions operations by the end of 2011, and is directing more resources to the key growth At-Retirement and Workplace Savings markets, where Aegon has leading positions. As part of this process, Aegon has restructured its UK’s sales division, has sold its third party pension administration business and is closing its employee benefits software business.

Approval European Commission
In August, Aegon received final approval from the European Commission regarding the capital support obtained from the Dutch State in December 2008 at the height of the financial crisis. Aegon has repaid a further EUR 500 million to the Dutch State and aims to repay the remaining EUR 1.5 billion by the end of June 2011, market conditions permitting.

Use this link for the table Financial overview and Revenue-generating investments (pdf-330Kb).

OPERATIONAL HIGHLIGHTS

Underlying earnings before tax
Aegon’s underlying earnings increased to EUR 473 million in the third quarter, a significant improvement compared with the same period last year. This increase in earnings was mainly the result of growth in most businesses, strict cost control, higher equity markets and strengthening of the
US dollar against the euro.

In the Americas, underlying earnings rose to EUR 376 million, primarily the result of higher fee and investment income, partly offset by charges of EUR 59 million related to changes in policyholder behavior assumptions. Underlying earnings in the Netherlands remained strong at EUR 97 million. In the United Kingdom, underlying earnings increased to EUR 28 million as earnings for the same period last year were affected by an exceptional charge of EUR 43 million related to a program to improve the consistency of customer records. Underlying earnings from New Markets increased to EUR 55 million as the contribution of Aegon Asset Management and associates was only partly offset by higher non-life claims in Central & Eastern Europe and continued investments in growth of the business in Asia. Higher funding costs and increased expenses resulted in EUR 83 million of expenses in the third quarter of 2010 for the holding company.

Net income
Net income increased significantly to EUR 657 million. This was primarily the result of higher underlying earnings, a positive contribution from fair value items, higher realized gains on investments and lower impairments.

Fair value items
In the third quarter, results from fair value items amounted to EUR 204 million. In the Americas, fair value items were positively impacted by lower implied volatility and favorable equity markets in the third quarter. In addition, the net hedge result was small, as hedge results from Aegon’s macro equity hedge program were more than offset by the effect of favorable equity markets on guarantees. In the Netherlands, the positive contribution was the result mainly of an increase in the fair value of guarantees, net of related hedges.

A narrowing of Aegon’s own credit spread, in addition to negative fair value movements in derivatives, resulted in a loss of EUR 60 million for the holding company.

Realized gains on investments
In the third quarter, realized gains on investments amounted to EUR 129 million. In the United States, gains were mainly related to normal trading in corporate investment grade bonds, while in the Netherlands gains were primarily due to sales of high yield and emerging market debt.

Impairment charges
Net impairments for the quarter amounted to EUR 92 million and were mostly linked to US housing related securities. Compared with the previous quarter, gross impairments remained at the same level, while recoveries declined.

Other charges
Other charges of EUR 14 million included EUR 12 million related to restructuring in the United Kingdom.

Run-off businesses
Aegon’s run-off businesses in the Americas recorded a loss in the third quarter of EUR 28 million, an improvement over recent quarters.

Income tax
Tax charges for the quarter amounted to EUR 15 million. These charges included EUR 46 million in tax benefits related to cross-border intercompany reinsurance transactions between the United States and Ireland and tax benefits of EUR 98 million resulting from the utilization of tax losses for which previously no deferred tax asset was recognized. In the United Kingdom, tax credits of EUR 29 million related to a reduction of the corporate tax rate from 28% to 27% effective from April 1, 2011 with consequential impact on deferred taxes.

Operating expenses
Operating expenses increased 7% to EUR 835 million due to a strengthening of the US dollar and pound sterling against the euro. At constant currencies, however, operating expenses declined 1% as result of a number of measures to reduce expenses, partly offset by investments in New Markets.

New life sales
New life sales increased 7% compared with the third quarter of 2009 to EUR 527 million as most units experienced growth. The main drivers behind the increase were retail life sales in the Americas, pension sales in the United Kingdom and favorable exchange rates, partly offset by lower sales in the Netherlands.

Deposits
Gross deposits, excluding run-off businesses, increased 38% to EUR 9.4 billion. This substantial increase was the result mainly of strong third-party asset management deposits.

Value of new business
Compared with the third quarter 2009, the value of new business declined considerably to EUR 120 million. In the Netherlands, the decline in value of new business is attributable to lower sales and a decrease in margins, while in the United Kingdom the main reason for the decline was a decrease in immediate annuity sales and margins. In the Americas, the value of new business declined mainly due to lower sales of fixed annuities in addition to lower margins in the life insurance businesses.

Revenue-generating investments
Revenue-generating investments decreased slightly compared with the end of the second quarter 2010 to EUR 405 billion, primarily as a result of a weakening of the US dollar against the euro.

Capital management
At the end of the third quarter, Aegon’s core capital position, excluding revaluation reserves, amounted to EUR 17.2 billion, equivalent to 74%7) of the company’s total capital base and above its target threshold of 70%. Aegon’s aim is to increase the proportion of core capital to at least 75% by the end of 2012.
 
Aegon’s revaluation reserves at September 30, 2010, increased significantly to EUR 2.3 billion. This significant improvement was mainly the result of an increase in the value of fixed income securities as a result of lower risk-free interest rates and a further narrowing in credit spreads.

Shareholders’ equity rose compared with the end of the second quarter to EUR 18 billion, mainly as a result of improved revaluation reserves and third quarter net income, partly offset by the weaker US dollar.

Excess capital above S&P’s AA capital adequacy requirements rose to EUR 3.3 billion, of which EUR 2 billion was held in operating units and EUR 1.3 billion at the holding company. An additional payment of EUR 563 million to the Dutch State was more than offset by the positive effect of earnings of EUR 0.6 billion and further capital preservation measures of EUR 0.3 billion.

During the third quarter of 2010, Aegon’s Insurance Group Directive (IGD) solvency ratio increased to 205%.

Improved longevity in the Netherlands
Updated mortality tables show a strong increase in life expectancy in the Dutch population. Aegon is in the process of assessing the possible impact of this on its insurance reserves. The company expects that adoption of these new mortality tables will have no immediate impact on earnings. However, higher longevity charges will impact underlying earnings over time. The impact on excess capital above S&P’s capital adequacy requirements is currently estimated to be less than EUR 250 million.