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Aegon posts strong results for second quarter 2010

The Hague, August 12, 2010

“The significant increase in sales, underlying earnings and net income during the second quarter of this year demonstrate the continued strength of Aegon’s business."

Increase in underlying earnings and net income

  • Underlying earnings before tax increase to EUR 522 million, supported by improved financial markets
  • Impairments decline to EUR 77 million, their lowest level in two years
  • Net income improves significantly to EUR 413 million 
  • Return on equity of 9.7%

Increase in sales and deposits

  • New life sales of EUR 590 million, driven by increased sales in the United States and United Kingdom 
  • Gross deposits total EUR 7.6 billion, driven mainly by strong pension deposits in the Americas
  • Value of new business declines to EUR 148 million, mainly due to decrease of sales in US fixed annuities and UK immediate annuities as a result of earlier repricing

Continued strong capital position

  • Excess capital above S&P’s AA capital adequacy requirements declines to EUR 3.0 billion, as higher capital requirements from S&P offset earnings contribution
  • IGD a) capital surplus of EUR 7 billion, equivalent to solvency ratio of approximately 200%
  • Shareholders’ equity increases to EUR 8.83 per common share
  • No interim dividend on common shares

Statement of Alex Wynaendts, CEO

“The significant increase in sales, underlying earnings and net income during the second quarter of this year demonstrate the continued strength of Aegon’s business. Consistent with our focus on serving the growing need for long-term retirement security, pension sales were particularly strong in the Americas and the United Kingdom. Impairments in our investment portfolio continued their downward trend, reaching their lowest level in two years and approaching our long-term assumptions. As a result of changes to S&P’s capital requirements for our businesses, Aegon’s excess capital declined, however, it continues to provide what we consider a solid buffer. We are implementing a number of key measures, as announced in June, to sharpen our focus on our core activities and improve returns, particularly within our business in the United Kingdom. At the same time, we are continuing to pursue our options for Aegon’s life reinsurance business, which include finding a suitable buyer for Transamerica Reinsurance. Furthermore, we expect soon to receive a final decision from the European Commission on the plan we submitted to demonstrate Aegon’s long-term viability as part of the State support Aegon received at the height of the financial crisis in 2008. We will communicate that decision at the earliest opportunity. Going forward, we will maintain our focus on better leveraging our broad resources, pursuing further operational improvements and putting Aegon’s proven expertise to work for our customers in all our markets.”

Please view the table Key performance indicators (for notes see page 23 of the full version).

STRATEGIC HIGHLIGHTS

  • Sharpened focus on core activities of life insurance, pensions and asset management
  • Restructuring UK business; targeting cost reductions of 25% by end 2011 to improve returns
  • Exploring strategic options for life reinsurance business, including identifying a suitable buyer
  • Appointment of global head of human resources

At the Analyst & Investor Conference last June, CEO Alex Wynaendts announced new measures to focus more on key long-term growth opportunities in Aegon’s core activities and further improve returns from the company’s existing businesses. Over the next five years, Aegon aims to become a leader in all of its chosen markets by being the most recommended life and pensions company by customers, the preferred partner for distributors and an employer of choice among current and prospective employees.

Reallocate capital
One of Aegon’s key strategic objectives is to focus on its core businesses of life insurance, pensions and asset management, and achieve a greater geographical balance by reallocating capital to the growth markets of Central & Eastern Europe, Asia and Latin America. Aegon continues to assess its businesses to ensure they meet requirements in terms of earnings growth, cash flow generation, return on capital and customer life cycle needs. As part of this review, Aegon announced in June that it would explore strategic options for Transamerica Reinsurance, the company’s life reinsurance business, including finding a suitable buyer.

As part of efforts to further improve its risk profile, Aegon will also be increasing equity hedging of its back book of variable annuities in the United States and continue to shift its focus to fee-based business from spread-based products.

Increase returns
In the United Kingdom, Aegon is taking significant steps to improve the return on capital by targeting cost reductions of 25% in the company’s life and pension operations and refocusing resources on the At Retirement and Workplace Savings markets where there is strong potential for growth and Aegon has leading positions. In addition, Aegon has withdrawn from the UK bulk annuities market and is exploring strategic options for parts of its existing back books. Taken together, these measures are aimed at improving return on capital from Aegon’s UK business to 8%-10% and cumulative cash flows of GBP 600 million to 650 million by 2014.

Aegon aims to increase returns by delivering operational excellence in all of its businesses. This will be achieved by further reducing costs while investing in core capabilities and improving service levels to ensure continued customer loyalty.

In addition, Aegon is developing new products that are simpler, more transparent and offer customers better value. To deliver on this strategy, Aegon will further invest in its global workforce. As part of this approach, the company has launched a global talent management program aimed at encouraging and developing talent among employees. Last month, Aegon announced the appointment of a new global head of human resources, Carla Mahieu, who will work with business units to better leverage the top talent available throughout the organization. In addition, Aegon is rolling out an engagement plan for employees around the world and has taken steps to bring target compensation for senior management further in line with the company’s overall strategic objectives.
 
Optimize ONE Aegon
Over the past two years, measures have been taken to manage Aegon more as one international company. Aegon is committed to making better use of its global resources in managing its businesses, to standardize best practices and to introduce a single balance sheet approach to capital management.

To meet these objectives, Aegon will implement and monitor new performance measurement standards across the company.

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

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.

 

OPERATIONAL HIGHLIGHTS

Underlying earnings before tax
Aegon’s underlying earnings before tax increased to EUR 522 million in the second quarter, a significant improvement compared with the same period last year. This increase in earnings was due mainly to improved financial markets, strengthening of the US dollar against the euro and growth of the business, while last year’s earnings had also included several exceptional items.

In the Americas, underlying earnings totaled EUR 437 million, a 51% increase compared with last year, primarily the result of higher investment income, a recovery in equity markets and lower expenses.

Underlying earnings in the Netherlands came in strong at EUR 97 million. However, earnings declined as the second quarter last year had included a one-time release in provisions of EUR 20 million. Results for the second quarter of 2010 were also affected by lower investment income and the sale of Aegon’s Dutch funeral insurance business.

In the United Kingdom, underlying earnings increased slightly to EUR 22 million as higher profits from annuities were partly offset by higher project-related expenses.

Underlying earnings from New Markets declined to EUR 40 million. The inclusion of Aegon Asset Management was more than offset by lower results from Central & Eastern Europe and further investments in the company’s operations in Asia.

Expenses for the holding company increased slightly in the second quarter of 2010 to EUR 74 million, primarily a result of higher funding costs.

Fair value items
In the second quarter, fair value items showed an overall performance of EUR 3 million.

Overperformance in the Netherlands was the result mainly of gains in the fair value of guarantees and related hedges, partly offset by lower residential real estate values. In the Americas, underperformance was due primarily to a decline in results from credit derivatives and variable annuity guaranteed minimum withdrawal benefits products, which offset gains from the company’s macro equity hedge.

Aegon has decided to set its short term equity market return assumption in determining estimated gross profits on variable life and variable annuity products in the Americas at 9% for the second quarter, reflecting the continued volatility experienced in equity markets and the use of macro equity hedges. This decision resulted in an additional charge of EUR 144 million, which has been included in fair value items, partly offsetting gains from the company’s macro equity hedge.

In addition, a widening of Aegon’s own credit spread was more than offset by fair value movements of derivatives, which resulted in a loss for the holding company.

Gains on investments
In the second quarter, realized gains on investments increased to EUR 148 million. In both the United States and the Netherlands, gains were related primarily to the sale of bonds as part of asset and liability management, while the gain of EUR 97 million in the holding was realized on investments related to excess capital.

Impairment charges
Net impairments continued their downward trend, amounting to EUR 77 million, reaching their lowest level in two years and approaching Aegon’s long-term assumptions. Impairments during the second quarter were primarily related to US housing related securities.

Other charges
Other charges amounted to EUR 60 million. These included a one-time provision of EUR 105 million for settlement of a dispute related to a Bank-Owned Life Insurance (BOLI) policy in the United States. Subsequent to the disruption in the credit market, which affected the investment value of the policy’s underlying assets, a suit was filed alleging that the policy terms were not sufficiently fulfilled by Aegon.

This provision was partly offset by a book gain of EUR 33 million from the sale of Aegon’s funeral insurance business in the Netherlands.

Run-off businesses
Aegon’s run-off businesses in the Americas recorded a loss in the second quarter of EUR 49 million. This loss was lower than expected because of better portfolio yields.

Income tax
Tax charges in the second quarter amounted to EUR 74 million and included a EUR 26 million tax benefit related to cross-border intercompany reinsurance transactions between the United States and Ireland.

Operating expenses
Operating expenses increased 3% to EUR 841 million due to a strengthening of the US dollar and pound sterling against the euro. However, operating expenses declined 2% at constant currencies as result of a number of initiatives to reduce expenses.

New life sales
New life sales increased 22% compared with the second quarter of 2009 to EUR 590 million as almost all units experienced double-digit growth. The main drivers behind the increase were pension sales in the United Kingdom and retail life sales in the Americas.

Deposits
Gross deposits, excluding run-off businesses, rose 16% to EUR 7.6 billion. Primary drivers of the increase were third-party asset management, US pensions and retail mutual fund inflows, offsetting lower fixed annuity deposits, which were managed lower. Net deposits totaled EUR 1 billion, excluding Aegon’s run-off businesses, as all units reported positive net deposits.

Value of new business
Aegon’s value of new business declined to EUR 148 million in the second quarter due to a decrease in the United Kingdom, following earlier repricing of immediate annuities and lower fixed annuity sales in the United States. In Spain, lower sales of risk products also led to a lower value of new business.

In the second quarter, 22% of Aegon’s total value of new business came from New Markets. The internal rate of return on new business remained strong at 18% in the second quarter.

Revenue-generating investments
Revenue-generating investments increased 5% compared with the end of the first quarter to EUR 409 billion, primarily as a result of a strengthening in both the US dollar and the pound sterling against the euro.

Capital management
At the end of the second quarter, Aegon’s core capital position, excluding revaluation reserves, amounted to EUR 18.6 billion, equivalent to 74% 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 over time to 75%6.

Aegon’s revaluation reserves at June 30, 2010, turned positive for the first time in almost three years and amounted to EUR 588 million. This significant improvement is mainly the result of an increase in the value of fixed income securities.

Shareholders’ equity rose to EUR 17.2 billion as a result of the improved revaluation reserves, strengthening of the US dollar and the pound sterling against the euro, and the addition of second quarter net income.

Excess capital above S&P’s AA capital adequacy requirements declined to EUR 3.0 billion, of which EUR 1.9 billion was held in operating units and EUR 1.1 billion at the holding company. Positive contributions from earnings and capital preservation measures were more than offset by increased capital requirements for asset related risks. Standard & Poor’s revised their risk factors, significantly increasing applied charges related primarily to bond portfolios. As a result, capital requirements in the Americas rose during the second quarter by USD 0.9 billion.

At June 30, 2010, Aegon’s Insurance Group Directive (IGD) capital surplus totaled EUR 7 billion, equivalent to a solvency ratio of approximately 200%.

Over the past few months, Aegon has been engaged in the process of obtaining the European Commission’s final consent to the terms relating to Aegon’s participation in the capital support program of the Dutch State. Aegon expects the European Commission to announce its final decision in the near future.

Dividend
Aegon’s dividend policy remains unchanged and is based on its capital position and cash flows. Aegon aims to maintain a sizeable cash buffer in order to fulfill its priority of repaying the Dutch State as soon as it is responsible and feasible to do so. Aegon will therefore not declare an interim dividend to common shareholders in 2010.

Risk management
In the second quarter, Aegon reduced its already limited exposure to peripheral European sovereign bonds, which amounted to a market value of EUR 1.5 billion at June 30, 2010. As part of this reduction, Aegon sold approximately EUR 450 million in Spanish government bonds during the quarter.

Financial strength ratings
During the second quarter, the financial strength ratings of Aegon’s US operating companies were upgraded by A.M. Best to A+ with a Stable outlook, reflecting A.M. Best's assessment of the companies’ financial strength and support of the parent. In July, Fitch Ratings lowered Aegon’s operating companies’ insurer financial strength ratings to AA- and raised the outlook to Stable.

 

Cautionary note regarding non-GAAP measures
This press release includes certain non-GAAP financial measures: underlying earnings before tax and value of new business. The reconciliation of underlying earnings before tax to the most comparable IFRS measure is provided in Note 3 "Segment information" of our Condensed consolidated interim financial statements. Value of new business is not based on IFRS, which are used to report Aegon's quarterly statements and should not viewed as a substitute for IFRS financial measures. Aegon believes that these non-GAAP measures, together with the IFRS information, provide a meaningful measure for the investment community to evaluate Aegon’s business relative to the businesses of our peers.

Local currencies and constant currency exchange rates
This press release contains certain information about our results and financial condition in USD for the Americas and GBP for the United Kingdom, because those businesses operate and are managed primarily in those currencies. Certain comparative information presented on a constant currency basis eliminates the effects of changes in currency exchange rates. None of this information is a substitute for or superior to financial information about us presented in EUR, which is the currency of our primary financial statements.