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Aegon Announces Q1 2011 Net Income of EUR 327 Million

The Hague, May 12, 2011

Underlying earnings growth in Americas and New Markets offset by declines in UK and Netherlands

Underlying earnings before tax of EUR 414 million; strong earnings from US pensions and variable annuities offset by exceptional charges in the UK (EUR 24 million) and higher provisioning for longevity in the Netherlands (EUR 24 million)

  • Net income of EUR 327 million, supported by lower impairments (EUR 62 million) and higher earnings from run-off businesses (EUR 22 million)
  • RoE declines to 7.8% as a result of lower net underlying earnings and higher average shareholders’ equity

Sales growth in fee-based businesses – key area of focus

  • Total sales* of EUR 1,411 million
  • New life sales total EUR 501 million; higher sales in New Markets and the Netherlands offset by the UK
  • Gross deposits total EUR 7.4 billion, supported by strong US sales of pensions and variable annuities consistent with strategy to increase fee-based business

Continued strong capital position and cash flows

  • Excess capital** totaled EUR 3.7 billion, of which EUR 1.3 billion at the holding after repurchase of convertible core capital securities from Dutch State and equity issuance
  • IGD a) solvency ratio of 209%
  • Operational free cash flow of EUR 264 million

Statement of Alex Wynaendts, CEO
“We made solid progress on Aegon’s strategic objectives during the quarter, which include the repurchase of EUR 750 million of core capital securities from the Dutch State in March. The recently announced divestment of Aegon’s life reinsurance business further supports our aim to complete the repurchase of all remaining securities by the end of June. With these key achievements – along with the other actions we have taken in recent years to optimize our portfolio of businesses – we have established a new basis from which to pursue Aegon’s ambitions.”

“During the first quarter, Aegon’s businesses in the United States continued to show strong results, both in terms of earnings as well as sales. The strong sales of pensions and variable annuities clearly support our strategic shift to more fee-generating business. In the Netherlands, we have been observing a strong increase in life expectancy and are taking a prudent approach by now increasing our provisioning which will have an impact on the earnings of our Dutch business going forward. In the United Kingdom, we are confident that our new CEO and management team will fully deliver on our plans.”

“We were particularly pleased by the strong new life sales achieved by Aegon’s newer businesses in Central & Eastern Europe and Asia. Over time, these key growth regions, in addition to Latin America, will enable us to achieve a broader geographical balance given the substantial opportunity they present.”

Please view the table Key performance indicators (for notes see page 20 of the full version)

STRATEGIC HIGHLIGHTS

  • Announcement of divestment of Transamerica Reinsurance for a total consideration of USD 1.4 billion
  • Equity issuance of EUR 903 million
  • Repurchase of EUR 750 million convertible core capital securities from the Dutch State
  • Fully hedged US GMIB back-book and further reduced exposure to peripheral European sovereign bonds
  • Restructuring in the UK on track; appointment of Adrian Grace as CEO of Aegon UK 

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.

Sustainable earnings growth with an improved risk-return profile
Aegon is well on track with the process of transforming its businesses and operations aimed at delivering sustainable earnings growth with an improved risk-return profile. Aegon has announced specific targets which reflect the company's pursuit of these objectives:

- Grow underlying earnings before tax  on average by 7%-10% per annum;
- Achieve a return on equity of 10%-12% in the medium term;
- Increase fee businesses to 30%-35% of underlying earnings before tax by 2015;
- Increase normalized operating free cash flow from a level of EUR 1.0-1.2 billion by 30% by 2015;
- Intention to resume dividend payments with EUR 0.10 per common share related to H2 2011 in May 2012.
 
Aegon’s ambition
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.
 
Reallocate capital
Aegon has taken steps to sharpen its focus on the company’s three core businesses: life insurance, pensions and asset management. The company 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 has assessed 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. As further evidence of this focus, Aegon has recently announced the divestment of its life reinsurance business, Transamerica Reinsurance, for a total after-tax consideration of USD 1.4 billion. Aegon expects to upstream USD 1.1 billion to the holding company to support the repurchase of the remaining convertible core capital securities issued to the Dutch State. Aegon aims to fully repurchase these securities by the end of June 2011.

In addition to reallocating its capital to those regions that offer higher growth and returns, Aegon is also shifting its focus from the sale of spread-based products to fee-based products. This is evidenced by the strong increase in sales of variable annuity and pension products in the United States.

Improve risk profile
As previously announced, Aegon has taken steps to equity hedge its Guaranteed Minimum Income Benefit (GMIB) back-book of variable annuities in the United States. Aegon has now fully covered the equity exposure related to this back-book of GMIB variable annuity guarantees.

In order to improve the risk-return profile of stable value solutions, Aegon’s synthetic guaranteed investment contracts business in the United States, a number of contracts have been terminated or contract terms have been tightened for remaining contracts. Fees have been increased to 20 basis points on average from 15 basis points previously.

During the first quarter, Aegon further reduced its already limited exposure to peripheral European sovereign bonds, based on fair value, to EUR 1 billion or 0.7% of its general account investments.

Increase returns
Aegon’s aim is to increase returns in all of its businesses by increasing efficiency and delivering operational excellence. This will be achieved by further reducing costs while investing in core competences 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 implementing a broad restructuring program to reduce cost by 25% in its life and pensions operations by the end of 2011. The restructuring program is on track. As part of this process, Aegon has appointed new senior management in the past 18 months. Most recently, Adrian Grace was appointed CEO of Aegon UK.

Optimize ONE Aegon
Over the past three years, measures have been taken to manage Aegon more as an international company. Aegon is committed to making better use of its global resources in managing its businesses and will continue to standardize best practices across the company.

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

OPERATIONAL HIGHLIGHTS

Underlying earnings before tax
Aegon’s underlying earnings before tax amounted to EUR 414 million in the first quarter, a 7% decline compared with the same quarter last year.

Underlying earnings from the Americas represent the results of ongoing businesses. As previously announced, earnings from the BOLI/COLI and life reinsurance businesses are reported in the run-off line of business from the first quarter of 2011. All comparative numbers have been adjusted accordingly. On this new basis, underlying earnings from the Americas increased 3% compared with the first quarter of 2010 to EUR 347 million for the first quarter 2011. Higher fee income related to growth in pension, variable annuity and retail mutual fund account balances more than offset lower spread income. This was consistent with Aegon’s strategy to increase earnings from its fee businesses.

In the Netherlands, underlying earnings decreased to EUR 81 million as a result of an increased level of provisioning for longevity, as previously indicated. Updated projected mortality tables show a strong increase in life expectancy in the Dutch population. IFRS provisioning is based on yearly observed mortality tables and is taken through underlying earnings, in line with our accounting methodology. Based on this actual experience, the company takes a measured approach toward provisioning by assuming a continuation of the emerging trend of strong improvements in observed mortality for 2010. Aegon expects to add on average EUR 20 million per quarter to the provision, in addition to 2010 levels of provisioning.

In the United Kingdom, underlying earnings declined to EUR 12 million. The decrease was due to charges of EUR 24 million mainly related to an ongoing program to correct historical issues within customer policy records.

Underlying earnings from New Markets increased to EUR 57 million driven by Variable Annuities Europe and Aegon Asset Management.

Higher funding costs and increased expenses related to the preparation for implementation of Solvency II resulted in increased costs for the holding company in the first quarter of 2011.

Net income
Net income amounted to EUR 327 million, supported by lower impairments and higher earnings from run-off businesses. Higher net income for the Americas, the United Kingdom and New Markets was more than offset by lower net income for the Netherlands.

Fair value items
In the first quarter, fair value items recorded a loss of EUR 85 million. A considerable improvement in the Americas, attributable mainly to strong results from real estate and private equity investments, was more than offset by an exceptional loss on strategic allocation funds in the Netherlands.

Realized gains on investments
Realized gains on investments amounted to EUR 91 million for the quarter and were mostly the result of normal trading in the investment portfolio.

Impairment charges
Impairment charges, net of EUR 26 million in recoveries, declined sharply to EUR 62 million and were mostly linked to residential mortgage-backed securities.

Other charges
Other charges totaled EUR 3 million. A benefit of EUR 37 million related to a settlement of legal claims was more than offset by a EUR 20 million charge related to the full year Hungarian bank tax and restructuring charges in the Netherlands (EUR 8 million), the United Kingdom (EUR 8 million) and New Markets (EUR 6 million).

Run-off businesses
As of the first quarter of 2011, Aegon’s run-off line of business in the Americas comprises the institutional spread-based business, structured settlement pay-out annuities, BOLI/COLI and life reinsurance. The latter two have been included for the first time this quarter. The results of the combined run-off businesses increased to EUR 22 million, mainly as a result of a lower amortization yield paid on internally transferred assets related to the institutional spread-based business and favorable mortality results in the pay-out annuities block of business.

Income tax
Tax charges for the quarter amounted to EUR 50 million. These charges included EUR 17 million in tax benefits related to cross-border intercompany reinsurance transactions and a tax credit of EUR 23 million driven by the reduction of the UK corporate tax rate to 26% effective from April 1, 2011, with consequential impact on deferred taxes.

Operating expenses
Operating expenses increased 3% to EUR 837 million. The increase was driven by higher restructuring charges and the unfavorable effects of movements in currency exchange rates. Excluding restructuring charges and at constant currencies, operating expenses decreased 1%.

Sales and deposits
In order to provide a more accurate view of overall sales generated by its businesses, Aegon has introduced a composite sales number consisting of new life sales, new premium production of both accident & health insurance and general insurance and 1/10 of gross deposits. According to this indicator, sales decreased marginally by 2% to EUR 1.4 billion as a result of lower asset management deposits.

New life sales for the first quarter of 2011 increased in all units except the United Kingdom and amounted to EUR 501 million.

Gross deposits amounted to EUR 7.4 billion. Growth in US pension and variable annuity deposits was offset by lower asset management deposits and lower savings deposits in the Netherlands.

Value of new business
Compared with the first quarter of 2010, the value of new business declined considerably to EUR 118 million, mainly a result of lower margins on mortgages and updated mortality assumptions in the Netherlands.

Revenue-generating investments
Revenue-generating investments were 3% lower compared with the end of the fourth quarter of 2010 at EUR 400 billion, primarily a result of the weakening of the US dollar against the euro.

Capital management
At the end of the first quarter, Aegon’s core capital position, excluding revaluation reserves, amounted to EUR 17.0 billion, equivalent to 75%6 of the company’s total capital base. The repurchase of convertible core capital securities from the Dutch State for an amount of EUR 750 million - plus a premium of EUR 375 million - was partly offset by an equity issue of EUR 0.9 billion. Aegon has announced its aim to achieve the proportion of core capital to be at least 75% of total capital by the end
of 2012.

The revaluation reserves at March 31, 2011 totaled EUR 0.7 billion, as an increase in risk-free interest rates had a negative impact on the value of fixed income securities.

Shareholders’ equity declined compared with year-end 2010 to EUR 16.9 billion mainly as a result of weakening of the US dollar against the euro.

During the first quarter, excess capital amounted to EUR 3.7 billion. Excess capital in the holding decreased to EUR 1.3 billion as a result of a EUR 1.125 billion payment to the Dutch State only partly offset by the proceeds of a EUR 0.9 billion equity issue. Excess capital in subsidiaries increased to EUR 2.4 billion as a result of capital generated in the operations.

On March 31, 2011, Aegon’s Insurance Group Directive (IGD) ratio amounted to 209%.

Cash flows
Aegon aims to deliver sustainable cash flows and dividends and has announced its intention to improve operational free cash flow from its current normalized level of EUR 1.0-1.2 billion per annum by 30% by 2015. Aegon intends to resume dividend payments on common shares after full repurchase of the convertible core capital securities from the Dutch State. Aegon intends to pay a dividend of EUR 0.10 per share, payable in May 2012, over the second half of 2011, market conditions permitting.

During the first quarter of 2011, Aegon’s subsidiaries generated EUR 539 million in operational cash flows. After deduction of EUR 275 million for investments in new business, operational free cash flow totaled EUR 264 million for the quarter.