Growth offset by unfavorable currency movements and anticipated exceptional charges
Continued strong sales in fee-based businesses in line with strategic focus
Strong capital position and healthy cash flows
“During the second quarter, we made solid progress in delivering on Aegon’s key strategic priorities, not least of which was the completion of repayment to the Dutch State. The particularly strong sales of variable annuities and pension and retirement products in the United States are a result of the successful repositioning of our business toward more fee-generating income. Our pursuit of growth opportunities in Aegon’s new markets led to strong new life sales in Central & Eastern Europe, as well as expanded distribution in Spain, where we recently strengthened our life insurance and pension partnership with Unnim, a leading savings bank in the northeastern region of the country.
“The weakening of the US dollar had a notable impact on Aegon’s reported results. Net income was strong for the quarter, however, underlying earnings were negatively affected by anticipated exceptional items in the United Kingdom and the Netherlands.
“Clearly, the current economic environment poses considerable challenges. However, over the past years we have implemented measures to strengthen and protect Aegon’s balance sheet by reducing our exposure to equity and credit markets, as well as interest rate risks. At the same time, we are restructuring our businesses in our key markets. These actions, along with our very limited exposure to peripheral European countries, support our confidence in Aegon’s growth prospects going forward.”
1 To reflect all of Aegon’s sales in one sales indicator, Aegon 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.
Please view the table Key performance indicators (for notes see page 22 of the full version).
To be a leader in all our chosen markets by 2015
Aegon’s STRATEGIC OBJECTIVES
Sustainable earnings growth with an improved risk-return profileAegon’s transformational process to deliver sustainable earnings growth with an improved risk-return profile is on track with the completion of full repayment to the Dutch State in June. The company reiterated its targets1 at its recent Analyst & Investor Conference in London:- Grow underlying earnings before tax on average by 7%-10% per annum;- Achieve a return on equity of 10%-12% by 2015;- Increase fee businesses to 30%-35% of underlying earnings before tax by 2015; and- Increase 2010 normalized operating free cash flow by 30% by 2015.
1 Main economic assumptions embedded in targets:annual gross equity market return of 9%, 10-year US interest rate of 5.25% in 2015 and EUR/USD rate of 1.35.
Aegon also announced its intention to achieve structural cost reductions in its established markets. In the Netherlands, a 20% reduction in operating expenses as compared to the 2009 base is targeted by the end of 2012. In the United Kingdom, Aegon is on track to reduce costs by 25% by the end of 2011. In the United States, Aegon aims to grow its life and protection business faster than the industry, while keeping operating expenses flat throughout the period until 2015.
Aegon’s ambitionAegon’s ambition to be a leader in all of its chosen markets by 2015 is supported by four strategic objectives: Optimize Portfolio, Enhance Customer Loyalty, Deliver Operational Excellence and Empower Employees.
These key objectives have been embedded in all Aegon businesses and provide the strategic framework for the company’s ambition to become the most-recommended life insurance and pension provider by customers and distributors, as well as the most-preferred employer in the sector.
Optimize portfolioIn Spain, Aegon has finalized an agreement to expand its life and health insurance and pension partnership with Unnim. The agreement includes the acquisition of a 50% stake in the life insurance business of Caixa Sabadell, expanding into the network of Caixa Manlleu and strengthening of Aegon’s existing partnership with Caixa Terrassa. These three savings banks joined together earlier this year to form Unnim. The agreement gives Aegon the exclusive right to distribute its life insurance and pension products through Unnim’s network of 623 branches. Unnim is a leading savings bank in the northeastern part of Spain, with a significant presence and more than one million customers.
Also, Aegon has closed an agreement to jointly develop health insurance business with Caja Navarra, part of Banca Cívica.
Aegon continues to closely monitor the process of consolidation and restructuring in the financial sector in Spain.
Aegon has appointed Jaime Kirkpatrick to the role of CEO of Aegon Spain effective July 1, 2011. Mr. Kirkpatrick has played a key role in expanding Aegon’s presence across the Spanish market in his previous capacity of director of bancassurance for Aegon Spain. On August 9, 2011, Aegon completed the divestment of its life reinsurance activities, Transamerica Reinsurance, to Scor. The total after-tax consideration amounted to USD 1.4 billion, consisting of cash proceeds of USD 0.9 billion from Scor and a further USD 0.5 billion of capital released. Aegon estimates that this transaction will have a positive impact on its IGD solvency ratio of approximately 13% in the third quarter of 2011.
Enhance customer loyaltyIn its aim to develop a stronger and more consistent brand portfolio globally, with shared purposes and core values, Aegon has sharpened its brand proposition in the United States. The company will bring together its North American retail businesses under one name, Transamerica. A new advertising campaign will be launched in September.
Aegon has also decided to rebrand its asset management activities in the United Kingdom as Kames Capital to enhance its distinctive investment propositions while supporting accelerated growth of the business.
Deliver operational excellence In the Netherlands, Aegon has decided to combine its pension service centre with its corporate & institutional clients sales unit into one pension business with the aim of increasing efficiency, providing better service and strengthening Aegon’s leading position in the Dutch pension market. The new unit will serve three customer groups – small and medium sized enterprises, institutional clients and pension plan participants.
Aegon has established a target to reduce the CO2 emissions of its offices by 10% by 2012. The goal is part of Aegon’s continuing efforts to manage all assets – including those that affect the environment – in a responsible way. In the long run, the changes that are implemented to meet the target will reduce costs as well as CO2 emissions. Setting a goal in this respect will also help the company meet the growing expectations of its stakeholders.
Use this link for the table Financial overview and Revenue-generating investments.
Underlying earnings before taxAegon’s underlying earnings before tax amounted to EUR 401 million in the second quarter. The decline, compared with the same quarter last year, was mainly due to unfavorable currency exchange rate movements, higher provisioning for longevity in the Netherlands and charges related to the customer redress program in the United Kingdom.
Underlying earnings from the Americas decreased to EUR 325 million. The decline was the result of a weakening of the US dollar against the euro and a lower contribution from fixed annuities as balances are being managed lower. Lower earnings from Life & Protection were offset by higher fee-based earnings, consistent with Aegon’s strategy.
In the Netherlands, underlying earnings decreased to EUR 74 million as a result of higher provisioning for longevity of EUR 23 million and investments in developing new distribution capabilities. Aegon expects to provision on average EUR 20 million per quarter in 2011 in addition to previous levels of provisioning.
In the United Kingdom, underlying earnings declined to EUR 10 million. The decrease was mainly due to charges of EUR 14 million related to an ongoing program to correct historical issues within customer policy records. Expenses related to the execution of this program amounted to EUR 7 million. In addition, investments in developing new propositions amounted to EUR 8 million.
Underlying earnings from New Markets increased to EUR 59 million driven mainly by strong earnings in Central & Eastern Europe and Aegon Asset Management.
Costs for the holding amounted to EUR 67 million as lower interest income and increased expenses related to the preparation for implementation of Solvency II were more than offset by a one-time benefit of EUR 14 million in the second quarter of 2011.
Net incomeNet income decreased slightly to EUR 404 million. Higher net income for the Americas and New Markets was offset by lower net income for the Netherlands and the United Kingdom.
Fair value items In the second quarter, fair value items recorded a loss of EUR 23 million. Negative results in the Americas, mainly related to lower interest rates and equity market volatility, were partly offset by positive fair value movements of derivatives related to debt issued by the holding.
Realized gains on investments Realized gains on investments amounted to EUR 204 million for the quarter and were the result of a strategic reallocation of equities into fixed income in the Netherlands in addition to normal trading in the investment portfolio.
Impairment chargesImpairment charges amounted to EUR 100 million and were linked to residential mortgage-backed securities in the United States and the result of exchange offers on specific holdings of European banks in the United Kingdom.
Other chargesOther charges amounted to EUR 16 million and are mostly related to restructuring charges in the United Kingdom (EUR 15 million), the Netherlands (EUR 10 million) and New Markets (EUR 3 million).
Run-off businessesThe results of run-off businesses increased to EUR 10 million, mainly as a result of a lower amortization yield paid on internally transferred assets related to the institutional spread-based business.
Income taxTax charges for the quarter amounted to EUR 72 million. These charges included EUR 4 million in tax benefits related to cross-border intercompany reinsurance transactions and a favorable tax settlement of EUR 15 million in the United States.
Return on equityIn the first half of 2011, Aegon’s return on equity declined to 8.0%, mainly the result of higher average shareholders’ equity excluding revaluation reserves. The increase in average shareholders’ equity was mainly the result of an equity issue of EUR 0.9 billion in February 2011.
Operating expensesAs a result of movements in currency exchange rates, operating expenses remained level at EUR 847 million. Excluding restructuring charges and employee benefit plans and at constant currencies, operating expenses remained level as well.
SalesAegon’s total sales decreased 15% to EUR 1.3 billion due mainly to unfavorable currency movements. At constant currencies, total sales declined 7%. New life sales were mainly impacted by lower production in the United Kingdom and the Americas following repricing of products, only partly offset by growth in Central & Eastern Europe.
Gross deposits amounted to EUR 6.7 billion, or a decline of 2% at constant currencies. Strong variable annuity and stable value deposits in the United States were more than offset by the effects of a weaker US dollar, lower asset management inflows and less savings account deposits in the Netherlands.
Value of new businessCompared with the second quarter 2010, the value of new business declined considerably to EUR 103 million. This was the result of higher mortgage-related funding costs and updated mortality assumptions in the Netherlands, lower new business volumes in the United Kingdom and Spain, discontinuance of new mandatory pension sales in Hungary and unfavorable currency exchange rates.
Revenue-generating investmentsRevenue-generating investments declined 2% compared with the end of the first quarter of 2011 to EUR 391 billion, the result of a weakening of the US dollar against the euro and the transfer of over EUR 2 billion of pension assets to the Hungarian State during the second quarter 2011.
Capital managementAt the end of the second quarter, Aegon’s core capital, excluding revaluation reserves, amounted to EUR 15.9 billion, equivalent to 73%6 of the company’s total capital base. The decline from the previous quarter was mainly due to the repurchase of all remaining convertible core capital securities from the Dutch State for an amount of EUR 750 million plus a premium of EUR 375 million. Aegon is on target to achieve the proportion of core capital to be at least 75% of total capital by the end of 2012
Shareholders’ equity remained level compared with first quarter-end 2011 at EUR 16.8 billion as net income in the second quarter was offset by the premium paid on the repurchase of the final tranche of convertible core capital securities from the Dutch State.
The revaluation reserves at June 30, 2011, increased to EUR 1 billion, mainly the result of a decrease in risk-free interest rates which had a positive effect on the value of fixed income securities. This positive effect was offset by a decline in the foreign currency translation reserve, primarily the result of a weakening of the US dollar against the euro.
Aegon aims to maintain at least 1.5 times holding expenses as a buffer at the holding, currently equivalent to approximately EUR 900 million. During the second quarter, excess capital in the holding decreased to EUR 1 billion. The EUR 1.125 billion payment to the Dutch State, holding costs, interest payments and the preferred dividend were partly offset by EUR 1.4 billion in dividends received from the company’s operating units.
At June 30, 2011, Aegon’s Insurance Group Directive (IGD) ratio amounted to ~200%, a slight decline from the level of ~210% at the end of the first quarter. Solvency ratios in the Netherlands and the United Kingdom were relatively flat, while the solvency ratio in the United States declined. The main driver of this decline was up-streaming of dividends to repurchase all remaining convertible core capital securities provided by the Dutch State for an amount of EUR 1.125 billion. The proceeds related to the divestment of Transamerica Reinsurance will be accounted for in the third quarter.
Cash flowsAegon’s subsidiaries generated EUR 564 million in operational cash flows during the second quarter of 2011. Operational free cash flows, which reflect excess capital generation, were relatively stable as the impact of realized gains in the Netherlands was offset by increased capital requirements in the United States related to low interest rates.
After deduction of EUR 281 million for investments in new business, operational free cash flow totaled EUR 283 million for the quarter. This brings the total for the first half year of 2011 to EUR 547 million of operational free cash flows.
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