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Aegon delivers growth in sales and earnings; maintains strong capital position

The Hague, May 10, 2012

“Following a year of considerable transformation, Aegon’s businesses made a strong start in the first quarter of 2012 with solid increases in sales and earnings."

Business growth, cost reductions and favorable financial markets drive higher earnings 

  • Underlying earnings increase to EUR 425 million, including additional adverse mortality experience of EUR 12 million compared to Q1 2011
  • Impairments decline to lowest level in four years to EUR 41 million
  • Net income increases to EUR 521 million driven by favorable fair value items results and tax benefits
  • Return on equity of 6.9%, or 7.8% excluding run-off businesses
  • Target of doubling fee-based earnings achieved: 35% of first quarter underlying earnings from fee businesses

Strong increase in total sales driven by pension and asset management deposits

  • US pension sales and new asset management mandates drive 50% increase in deposits to EUR 11 billion
  • Accident and health sales increase 23% to EUR 195 million, driven by growth in the Americas
  • New life sales decline 11% to EUR 445 million; increase in US offset by lower sales in UK and Netherlands
  • MCVNB increases to EUR 125 million; product repricing as a result of low interest rates

Continued strong capital position and cash flows

  • IGD a) solvency ratio increases to 201%; IGD surplus capital of EUR 7.1 billion
  • Capital base ratio of 74.2%; on track to exceed minimum of 75% by the end of 2012
  • Operational free cash flow increases to EUR 805 million, including EUR 400 million of exceptional items

Statement of Alex Wynaendts, CEO

"Following a year of considerable transformation, Aegon's businesses made a strong start in the first quarter of 2012 with solid increases in sales and earnings. Our successful efforts to reduce costs across our organization have created greater focus while also contributing to higher earnings. Our emphasis on serving the growing demand for retirement planning solutions led to the substantial increase in pension deposits in the United States and our third-party asset management business succeeded in capturing a significant inflow of new business. In keeping with one of our key strategic objectives, we delivered early on our target to generate a greater proportion of earnings from fee-based versus spread-based business.

"We were pleased with the low level of impairments during the quarter, their lowest in four years. At the same time, it continues to be our priority to maintain Aegon's strong capital position in this period of continued economic uncertainty.

"Aegon's first quarter results confirm the resilience of our franchise and that the actions being pursued by management are the right ones. It is for this reason that we look forward to resuming a dividend payment, which will be decided during our upcoming Annual General Meeting of Shareholders."

Please view the table Key performance indicators (for notes see page 21 of the full version).

STRATEGIC HIGHLIGHTS

  • Aegon details UK pensions reform proposition
  • Aegon expands strategic partnership with Liberbank in Spain
  • Aegon to delist its common shares from the London Stock Exchange

Sustainable earnings growth with an improved risk-return profile
Aegon aims to deliver sustainable earnings growth with an improved risk-return profile. The following targets* have been set by the company:
- Grow underlying earnings before tax on average by 7%-10% per annum between 2010 and 2015.
- Achieve a return on equity of 10%-12% by 2015.
- Increase fee-based earnings to 30%-35% of underlying earnings before tax by 2015.
- Increase normalized operational free cash flow by 30% by 2015 from 2010 level.

* Main economic assumptions embedded in targets: annual gross equity market return of 9%, 10 year US interest rate of 4.75% in 2016 and EUR/USD rate of 1.35.

Aegon believes it can achieve these targets at the lower end of the target ranges as the economic slowdown adversely affects the company's growth potential.


AEGON'S STRATEGIC PRIORITIES

  • Optimize portfolio
  • Enhance customer loyalty
  • Deliver operational excellence
  • Empower employees

Aegon's ambition
Aegon's aim 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. They 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 portfolio
In the United Kingdom, Aegon is positioning itself to capture the opportunities presented by pension reform and the introduction of automatic enrolment into pension schemes. In March 2012, Aegon announced it would be working with the National Employment Savings Trust (NEST) Corporation in the United Kingdom to provide integrated auto-enrolment support for employers who want to run an Aegon pension scheme alongside a NEST scheme. Auto-enrolment is expected to increase employer
and employee engagement in workplace pension arrangements and Aegon is well placed to offer complementary pension solutions. Aegon is on track to launch a dedicated workplace savings platform solution in mid-2012, as part of its recently launched Aegon Retirement Choices (ARC) platform.

Aegon is also focused on securing strategic distribution agreements in the United Kingdom ahead of the market changes as a result of the Retail Distribution Review and has recently confirmed it has been selected for the restricted advice panel of leading adviser group Sesame Bankhall.

Asia represents a key long-term growth market for Aegon. To fully optimize the prospects for Aegon's businesses throughout the region, all of Aegon's Asian operations are now managed from the company's regional head office in Hong Kong. This allows Aegon to better leverage product and distribution expertise, capture efficiencies, and pursue organic growth of Aegon's franchise in Asia.

As of the first quarter of 2012, Aegon has revised its financial reporting to reflect these changes in its organization. Businesses that were previously managed by Aegon Americas are included in the Asia line of business within the "New Markets" segment going forward. The change does not have any impact on consolidated total underlying earnings or net income reported by Aegon.

In Spain, Aegon has reached an agreement with Liberbank to expand its long-term life insurance and pension partnership with the acquisition of 50% of Liberbank Vida. In addition to the network of Caja Cantabria, the agreement now also includes the branch networks of Cajastur and Caja Extremadura. The agreement allows Aegon and Liberbank to provide life insurance and pension products to over one million clients through a network of over 700 branch offices.

In India, Aegon Religare has relaunched iTerm, an innovative term life insurance product combining it with a number of optional new riders. The company once again demonstrates its leading position in online sales and expects to sell at least 15 to 20 percent of its policies through online distribution within two years as millions of Indian consumers go online. Since the introduction of iTerm in 2009, over 19,000 policies have been sold online.

Aegon received approval from the Dutch Central Bank (DNB) to set up a second premiepensioen-instelling (PPI), a low-cost carrier for individual retirement savings accounts. Aegon's second PPI will provide defined contribution pension solutions for small- and medium-sized enterprises and is complimentary to Aegon's first PPI which specifically targets larger corporations.

Deliver operational excellence
In the United Kingdom, Aegon has successfully implemented its new operating model and reached its target to reduce operating expenses for its Life and Pension businesses by 25% from 2009 levels. The program to restructure the business delivers GBP 80 million in expense savings, the benefits of which are visible in 2012.

In the Netherlands, Aegon is on track with reorganizing its business to be more agile and better positioned to respond to changing conditions and opportunities in the Dutch market. The reorganization program and other initiatives will result in reducing the cost base for Aegon The Netherlands by EUR 100 million, compared to the cost base for 2010. The cost savings aim to offset pressure on underlying earnings from higher mortgage funding costs, increased longevity provisioning and a declining life insurance back-book. The majority of the cost savings is expected to be achieved in 2012. To date, Aegon has implemented costs savings of EUR 49 million.

Delisting from London Stock Exchange
Aegon will make an application to delist its common shares from the London Stock Exchange (LSE) in the United Kingdom. The volume of Aegon shares traded on the LSE is negligible and does not justify the related expenses. The last trading date will be announced once the application to delist has been accepted by the LSE. Aegon shares will remain listed on Euronext Amsterdam and the New York Stock Exchange.

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

OPERATIONAL HIGHLIGHTS

Underlying earnings before tax
Aegon's underlying earnings before tax increased 3% compared with the first quarter 2011 to EUR 425 million in the first quarter of 2012. This increase is the result of a strong delivery on cost reduction programs, higher fee-based earnings due to favorable equity markets and favorable currency movements. Earnings were negatively impacted by adverse mortality experience and lower fixed annuity earnings in the Americas, and in the Netherlands by poor morbidity experience.

Underlying earnings from the Americas amounted to EUR 292 million. The 13% decrease compare to the first quarter of 2011 is primarily due to unfavorable mortality results (EUR 12 million) and lower fixed annuity earnings, as the product is de-emphasized, partly offset by higher fee-based earnings. In addition, earnings were impacted by recurring charges for Corporate Center expenses (EUR 7 million) and an increase in employee benefit expenses (EUR 10 million).

In the Netherlands, underlying earnings decreased 2% to EUR 79 million. The decline was mainly the result of adverse claim experience on disability products in the non-life business offset by a higher contribution from Aegon's growing Dutch mortgage loan portfolio.

In the United Kingdom, underlying earnings more than doubled to EUR 29 million. The strong improvement in earnings was driven by the successful implementation of the cost reduction program in Aegon's businesses in the United Kingdom and the non-recurrence of exceptional charges recorded in the previous year.

Underlying earnings from New Markets increased 29% to EUR 88 million. The increase was mainly the result of higher underlying earnings at Aegon Asset Management as a result of the effects of growth, increased fees and phasing of expenses, only partly offset by lower underlying earnings from Central & Eastern Europe and Variable Annuities Europe.

Total holding costs decreased 24% to EUR 63 million as part of Aegon's Corporate Center expenses are now charged to the operating units. This change reflects the various services and support provided by the Corporate Center to operating units. The first quarter 2012 charge to operating units amounted to EUR 16 million.

Net income
All operating units contributed positively to net income in the first quarter 2012. The increase to EUR 521 million was driven by higher underlying earnings, favorable results on fair value items and lower impairments.

Fair value items
The results from fair value items increased to EUR 156 million. These positive results mainly related to alternative asset performance in the Americas, the guarantee portfolio in the Netherlands and derivatives in the holding.

Realized gains on investments
In the first quarter, realized gains on investments amounted to EUR 45 million and were the result of normal trading in the investment portfolio.

Impairment charges
Impairments decreased to EUR 41 million, the lowest amount in four years. Impairments continue to be primarily linked to residential mortgage-backed securities in the United States.

Other charges
Other charges amounted to EUR 17 million and consisted mainly of a EUR 17 million charge related to the full year 2012 Hungarian bank tax. Restructuring charges in the Netherlands (EUR 3 million) and Aegon Asset Management (EUR 1 million) were offset by income related to policyholder tax of EUR 6 million.

Run-off businesses
The results of run-off businesses amounted to a loss of EUR 2 million as positive results for BOLI/COLI (EUR 17 million) were offset by a loss on the institutional spread-based business (EUR 7 million) and the amortization of the prepaid cost of reinsurance asset related to the divestment of the life reinsurance activities (EUR 9 million).

Income tax
Income tax amounted to a charge of EUR 45 million in the first quarter, including a benefit of EUR 51 million related to the run-off of the company's institutional spread-based activities in Ireland. Also, a EUR 27 million tax benefit was recorded in the United Kingdom as a result of an announced tax rate reduction and the Netherlands reported a tax benefit of EUR 19 million resulting from a settlement.

Return on equity
Higher average shareholders' equity excluding revaluation reserves and lower net underlying earnings compared with the first quarter 2011, resulted in a return on equity of 6.9% for the first quarter 2012. Return on equity excluding the run-off businesses amounted to 7.8% over the same period.

Operating expenses
In the first quarter, operating expenses decreased 7% to EUR 781 million as a result of cost savings, lower restructuring charges and divestments.

Sales and deposits
Aegon's total sales increased 25% to EUR 1.8 billion. Increased new life sales in the Americas were offset by lower sales in the United Kingdom and the Netherlands. Strong gross deposits were particularly driven by pension deposits in the Americas and good performance in both the retail and institutional segments of Aegon Asset Management. New premium production for accident and health also increased strongly, mainly driven by travel insurance in the United States.

Market consistent value of new business
Aegon manages its business on an economic framework basis, meaning that it prices its products based on hedgeable market circumstances, versus assumptions about future economic conditions. As of the first quarter of 2012, Aegon starts disclosing the market consistent value of new business on a quarterly basis. At the same time, the publication of value of new business on the company's traditional embedded value basis is being discontinued.

Compared with the first quarter of 2011, the market consistent value of new business increased slightly to EUR 125 million. Higher profitability in the annuity business in the United Kingdom and a higher contribution from mortgage loans in the Netherlands were partially offset by a decrease in value of new business in the Americas due to lower interest rates.

Revenue-generating investments
Revenue-generating investments rose 3% compared with year-end 2011 to EUR 437 billion at March 31, 2012. The increase as a result of net inflows and the effect of higher equity markets on unit-linked and off balance sheet assets was partly offset by outflows from run-off businesses and fixed annuities.

Capital management
Aegon's core capital excluding revaluation reserves amounted to EUR 17.7 billion, equivalent to 74.2%6 of the company's total capital base at March 31, 2012. Aegon is on track to reach a capital base ratio of at least 75% by the end of 2012.

Shareholders' equity increased to EUR 21.3 billion. The increase was a result of first quarter's net income and an increase in the revaluation reserves partly offset by a decline in the value of the US dollar against the euro.

The revaluation reserves increased slightly to EUR 3.6 billion during the first quarter mainly the result of a tightening of credit spreads.

In addition, the foreign currency translation reserves declined, primarily the result of a strengthening of the euro against the US dollar. Shareholders' equity per common share, excluding preference capital, amounted to EUR 10.18 at March 31, 2012.

At the end of the first quarter 2012, excess capital in the holding amounted to EUR 1.4 billion. Aegon aims to maintain at least 1.5 times holding expenses as a buffer at the holding, in 2012 equivalent to approximately EUR 750 million.

At March 31, 2012, Aegon's Insurance Group Directive (IGD) ratio was 201%, an increase from the level of 195% at the end of 2011. Measured on a local solvency basis, the Risk Based Capital (RBC) ratio in the United States remained level at ~445%, the IGD ratio in the Netherlands increased to ~210%, while the Pillar I ratio in the United Kingdom was ~135% at the end of the first quarter 2012.

In May, Aegon completed the sale of EUR 667 million of SAECURE 11 notes. The transaction included a USD 600 million tranche of USD denominated residential mortgage-backed securities (RMBS) placed with US investors. With this transaction, Aegon is further diversifying its RMBS investor base outside Europe.

Aegon believes the successful placement is a recognition by US investors that Dutch RMBS notes are regarded as high-quality and that Aegon's SAECURE program is acknowledged as a top-tier program in the Dutch RMBS market. The net proceeds will be used to refinance part of the existing Dutch mortgage loan portfolio of Aegon.

Cash flows
Aegon aims to deliver sustainable cash flows and has announced its intention to improve operational free cash flow from its 2010 normalized level of EUR 1.0-1.2 billion per annum by 30% by 2015.

Aegon's subsidiaries generated EUR 805 million in operational free cash flows during the first quarter. Operational free cash flows were positively impacted by favorable interest rate movements and rising equity markets. Excluding exceptional items of approximately EUR 400 million, operational free cash flows totaled EUR 405 million. Operational free cash flows represent distributable earnings generation of the business units. The impact of capital preservation initiatives is not included in the reported operational free cash flows.