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Aegon increases profitability during fourth quarter

The Hague, February 25, 2010

“Clearly, the steps we have taken over the past year have delivered solid results - a return to profit, reduced expenses, and continued customer confidence, resulting in increased sales in all country units."

  • Strong increase in underlying earnings and net income
    - Underlying earnings before tax of EUR 427 million
    - Net income of EUR 393 million, due to improved earnings, realized gains on investments and lower impairments
    - Impairments of EUR 209 million, the lowest level in six quarters
    - Cost reduction measures of EUR 250 million realized in 2009, exceeding target of EUR 150 million
  • Robust sales demonstrating solid franchise
    - New life sales of EUR 549 million, driven by strong sales in most businesses
    - Net deposits, excluding institutional guaranteed products, of EUR 1.5 billion, due to strong sales of pensions and retail mutual funds
    - Profitable sales with value of new business of EUR 216 million and an internal rate of return of 17.6%
  • Continued strong capital position
    - EUR 0.8 billion in capital freed-up in Q4, totaling EUR 3.3 billion in 2009
    - Excess capital of EUR 3.7 billion by end December
    - Insurance Group Directive a) capital surplus of EUR 6.7 billion, equivalent to solvency ratio of 204%
  • No dividend on common shares

 

Statement of Alex Wynaendts, CEO

“Clearly, the steps we have taken over the past year have delivered solid results - a return to profit, reduced expenses, and continued customer confidence, resulting in increased sales in all country units. Aegon today is in a stronger financial position, which enabled us to repay one-third of the capital we obtained from the Dutch government. Given the uncertain environment, we believe that it continues to be prudent to maintain a substantial capital buffer, as reflected in our strong capital position. Although impairments improved during the quarter, they remained at elevated levels for the year, which led to lower cash flows from our operating units. Consequently, Aegon will not declare a dividend to common shareholders. Looking ahead, we are confident that our strategy will continue to reinforce Aegon’s strong position in the gradually improving economic environment.”

Use this link for the table key performance indicators.

Strategic highlights

Aegon continued to deliver on its strategic priorities:

  • To reallocate capital toward business with higher growth and return prospects
  • To improve growth and returns from existing businesses
  • To reduce financial markets risk
  • To manage Aegon as an international company. 

 

Portfolio review

Aegon continues to assess its businesses to ensure they meet requirements in terms of earnings growth, cash flow and return on capital. As part of this review, Aegon sold its funeral insurance business in the Netherlands in January 2010 for EUR 212 million. The sale will have a positive effect on Aegon’s excess capital position and is expected to result in a modest book gain in the first half of 2010.

Cost measures

During 2009, Aegon realized cost reduction measures of EUR 250 million, significantly above the company’s target for the year of EUR 150 million. Excluding the impact of restructuring charges, increased employee benefit expenses in the United States and currency movements, operating costs decreased in 2009 by 5% on a comparable basis.

Aegon’s total workforce, excluding agent employees, declined by 7% during the year to just over 25,000 employees. The decline was due mainly to restructuring in the United States and the United Kingdom, as well as the sale of real estate brokerage activities in the Netherlands and the sale of the company’s life insurance operations in Taiwan.

Capital & risk management

Capital preservation

During the fourth quarter of 2009, a further EUR 0.8 billion of capital was released from Aegon’s businesses, bringing the total for 2009 as a whole to EUR 3.3 billion.

Excess capital

  • Excess capital above S&P AA capital adequacy requirements amounted to EUR 3.7 billion at the end of the fourth quarter 2009, down from EUR 4.8 billion at the end of third quarter of 2009. The decline was due primarily to repayment of one-third of the EUR 3 billion in core capital provided by the Dutch State at the end of 2008. The repayment, including interest and premium for repayment, totaled EUR 1.15 billion.
  • De-risking and capital efficiency measures added EUR 0.8 billion to excess capital but were offset by other items, mainly related to higher regulatory and rating agency capital requirements for longevity and default provisioning. Statutory earnings of EUR 0.3 billion were partly offset by impairments of EUR 0.2 billion.
  • Under current uncertain circumstances, Aegon aims to maintain a substantial capital buffer.

Core capital

  • At year-end 2009, core capital, excluding the revaluation reserves, amounted to EUR 15.9 billion or 75% of the total capital base, well above Aegon’s self-imposed minimum target of 70% 6,7.
  • Core capital, including the revaluation reserves, totaled EUR 14.2 billion, comprising EUR 12.2 billion in shareholders’ equity and a further EUR 2 billion in convertible core capital securities.
  • Shareholders’ equity per common share of EUR 5.88.
  • The revaluation reserves amounted to a negative EUR 1.7 billion, a marginal improvement from the third quarter of 2009 as the positive effects of tightening credit spreads were almost entirely offset by the impact of rising risk-free interest rates and realized gains.
  • At the end of December 31, 2009, the Insurance Group Directive (IGD) capital surplus totaled EUR 6.7 billion, equivalent to a solvency ratio of 204%.

 

Improved risk profile

As announced in February last year, Aegon is running off its institutional spread-based business in the United States. The run-off will significantly reduce Aegon’s exposure to credit risk and help lessen overall sensitivity to fluctuations in financial markets. During the course of 2009, as planned, account balances of this business were reduced by USD 11.5 billion to USD 21.3 billion. During 2010, these balances are expected to be reduced by a further USD 8.5 billion. In order to fund these outflows, assets from the institutional spread-based business have been transferred internally to other businesses in the United States in exchange for cash. As a result, the institutional spread-based business realized a negative spread on these assets which adversely impacted underlying earnings.

Dividend

Aegon’s dividend policy remains unchanged and is based on its capital position and cash flows. Although the capital position is strong, cash flows were impacted by higher than average impairments in 2009. Therefore, Aegon will not declare a dividend to common shareholders over the fiscal year 2009.

Manage Aegon as an international company

At the end of the fourth quarter, Aegon launched a variable annuity product in the Netherlands, part of a broader effort to use existing knowledge and expertise in the United States to expand the company’s variable annuities business in Europe and Japan. Currently, variable annuity products are being sold in the United Kingdom, the Netherlands and France. In addition, toward the end of 2009, Aegon’s joint venture with Sony Life launched its first variable annuity product in the Japanese market.

The product is being distributed through Sony Life’s Lifeplanner channel and several banks, including megabank Sumitomo Mitsui Banking Corp. Sales will be reported starting in the first quarter of 2010.

New reporting structure

From the first quarter of 2010, Aegon will adjust its segment reporting structure to reflect recent structural changes in its organization. Comparable full year 2008 and quarterly 2009 numbers will be published on April 12, 2010. The day after, on April 13, Aegon will host a meeting in London to provide a further explanation to analysts and investors.

Financial highlights

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Operational highlights

Underlying earnings before tax

Aegon’s underlying earnings before tax amounted to EUR 427 million for the fourth quarter. Financial markets had a positive effect particularly compared with the same quarter last year, when the company’s earnings were severely impacted by the turmoil in world financial markets.

In the Americas, underlying earnings totaled USD 446 million compared with a loss of USD 412 million a year earlier. The improvement was due mainly to the recovery in financial markets, which had a positive effect on both technical results and fee income. These more than offset lower investment income as a result of increased cash balances in relation to the run-off of Aegon’s institutional spread-based business in the United States.

Underlying earnings in the Netherlands increased to EUR 95 million, up from EUR 75 million in the fourth quarter last year. This increase was mainly the result of improved technical results including several provision releases. Investment income was lower, primarily because the fourth quarter of 2008 included substantial non-recurring dividend income.

In the United Kingdom, underlying earnings amounted to GBP 30 million, a sharp increase from the fourth quarter of 2008, as significantly higher fee income from improved equity and bond markets offset lower earnings from life and protection and losses from distribution companies.

Underlying earnings from Other Countries totaled EUR 42 million in the fourth quarter, driven mainly by further growth in Central & Eastern Europe and Spain. Earnings for the same quarter last year included a sizeable one-time charge in Taiwan. Aegon’s Taiwanese life insurance operations were sold during 2009 and its results are no longer included in the company’s income statements. Excluding Taiwan, underlying earnings before tax increased 24%.

Expenses for the holding company amounted to EUR 48 million in the fourth quarter of 2009, compared with EUR 17 million last year, primarily a result of higher funding costs.

Fair value items

Fair value items include the over- or underperformance on certain assets held at fair value through profit or loss. In the fourth quarter, these showed an underperformance of EUR 174 million, a significant improvement compared with an underperformance of EUR 770 million in the fourth quarter of 2008. In the Americas, the underperformance of EUR 103 million was primarily attributable to losses on a macro equity hedge and negative revaluation of real estate related assets. Underperformance of fair value items in the Netherlands of EUR 43 million was due mainly to the impact of movements in the fair value of guarantees and related hedges. In addition, the further narrowing of Aegon’s own credit spread resulted in a loss of EUR 26 million for the holding company.

Gains on investments

Gains on investments amounted to EUR 324 million in the fourth quarter, a result primarily of trading in Aegon’s bond portfolios. In the Netherlands, investment gains were mainly the result of adjustments in the bond portfolio, in part driven by asset and liability management.

Impairment charges

Impairment charges decreased sharply compared with the fourth quarter of 2008 to EUR 209 million, the lowest level in six quarters, though they remained above Aegon’s long-term average expectations. Impairments on US housing related assets totaled EUR 92 million, while the remainder was related mostly to hybrid securities issued by Irish and UK banks.

Income tax

Income tax in the fourth quarter amounted to EUR 20 million and included a tax benefit of EUR 20 million related to cross border intercompany reinsurance transactions between Ireland and the United States. Tax gains related to these internal transactions totaled EUR 419 million in 2009, and are a partial reversal of the EUR 490 million in tax charges incurred during 2008.

Net income

Aegon’s net income increased to EUR 393 million compared with a loss in the fourth quarter of 2008. The improvement was the result of higher underlying earnings, as well as a significant improvement in the performance of fair value items, gains on investments, a sharp decline in the level of impairments and taxes.

Commissions & expenses

Total commissions and expenses declined by 25% compared with Q4 2008 to EUR 1.4 billion, a result primarily of accelerated amortization of deferred policy acquisition costs in the Americas in the fourth quarter of 2008 related to last year’s lower equity markets. Operating expenses decreased by 11% to EUR 830 million as a result of significant cost savings and weakening of the US dollar.

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New life sales

New life sales totaled EUR 549 million, up 13% compared with the third quarter. Most businesses reported increased sales for the quarter. In the Netherlands and the United Kingdom, sales increased primarily as a result of a rise in demand for Aegon’s pension products. In Spain and Asia, sales increased as Aegon’s businesses continued to expand, while in Central & Eastern Europe sales were unchanged from the third quarter.

Deposits

Gross deposits, excluding institutional guaranteed products, totaled EUR 5.9 billion in the fourth quarter. Pension deposits, saving deposits and variable annuities were all strong. However, as anticipated, fixed annuity deposits were lower, and will continue to be managed toward a lower level. Net deposits, excluding institutional guaranteed products, remained strong at EUR 1.5 billion.

Value of new business

Value of new business showed a substantial improvement across almost all countries compared with the third quarter and amounted to EUR 216 million. In the Americas, the increase was due mainly to higher margins for variable annuities and life reinsurance, while in the Netherlands higher spreads on mortgages was the main driver. Higher sales volumes were the main reason for an increase in value of new business in Spain.

Revenue-generating investments

Revenue-generating investments rose to EUR 361 billion at the end of December 2009, up 2% from the third quarter. The increase was mainly the result of a further rise in equity markets and a stronger US dollar at the end of the fourth quarter of 2009.