Aegon maintains strong capital position despite fourth quarter 2008 loss

"The severe disruption in world financial markets had a significant impact on Aegon’s earnings in the fourth quarter..."

Fourth quarter results in line with pre-announcement of February 17, 2009

  • Aegon maintains strong capital position:
  • Excess capital over AA capital adequacy requirements of EUR 2.9 billion;
  • IIGD a) capital surplus of EUR 5.6 billion, equivalent to a solvency ratio of 183%;
  • NAIC RBC b) ratio of 350% for the US life insurance operations; 
  • Core capital c) of EUR 16.2 billion excluding revaluation reserve at the end of 2008
    (EUR 9.1 billion including revaluation reserve);
  • Decline in revaluation reserve of EUR 1.7 billion in Q4, driven by widening in credit spreads
  • Underlying loss before tax of EUR 181 million, due mainly to reserve strengthening and accelerated amortization of deferred acquisition costs in the US, and lower fees in general
  • Net loss in Q4 of EUR 1.2 billion, including an extraordinary tax charge of EUR 300 million
  • New life sales in Q4 2008 of EUR 598 million; total gross deposits of EUR 11.9 billion; net deposits of EUR 1.7 billion
  • Value of new business in Q4 of EUR 233 million, with an internal rate of return of 16.5%

Statement Alex Wynaendts, CEO

“The severe disruption in world financial markets significantly impacted Aegon’s earnings during the fourth quarter of 2008. This challenging environment which has persisted in the early part of 2009 confirms that our strategic priorities of releasing capital and reducing costs, as well as putting in place contingencies to withstand further market deterioration are the right ones. In the fourth quarter, we released EUR 1 billion of capital and expect to release a further EUR 1.5 billion in 2009. Our businesses in the United States, the Netherlands and the United Kingdom are also on track to deliver on our target of EUR 150 million in cost reductions in 2009. We are pleased by the continued confidence of our customers as evidenced by resilient sales and a strong increase in deposits. We believe that the solid fundamentals of our business, combined with Aegon’s financial position and the actions we are taking justify their continued confidence.”

Use this link for the table key performance indicators 2008. 

Strategic highlights

In June 2008, Aegon set out three strategic priorities:
1. To reallocate capital toward businesses with higher growth and return prospects;
2. To improve growth and returns from existing businesses;
3. Manage Aegon as an international company.

Subsequently, at the Analyst & Investor Day on November 24, Aegon identified and announced three priorities to counter the challenges of the current global financial crisis and position the company for growth:

  • Focus on capital preservation and accelerate the capital release program, with a EUR 600-800 million target for Q4 2008;
  • EUR 150 million cost reduction program for 2009;
  • Develop contingency plans for continued deterioration in financial markets.

As announced last June, Aegon is conducting an ongoing review of its portfolio of businesses to ensure that they meet the criteria outlined in the strategy. On February 17, 2009, Aegon announced that due to the market dislocation it will downsize its institutional business (Aegon Institutional Market Division, IMD) in the Americas, which will result in lower credit risk in the long run and a release of capital in the near term. 

Aegon and the global financial crisis

In the fourth quarter of 2008, the financial crisis accelerated and a severe global economic downturn began to unfold. Liquidity in financial markets was severely affected. Equity markets were down by more than 20%, while equity market volatility rose to a historical high. Meanwhile, as government bond yields reached historic lows, credit spreads more than doubled across many market segments in Q4. 

The downturn in financial markets has significantly impacted Aegon’s results. Moreover, the continued deterioration in the US housing market increased risks in mortgage backed securities, leading to impairments. Also, corporate bonds, in particular high yield, experienced higher defaults.

In order to provide a fuller view of the possible impacts of the financial crisis on Aegon, management disclosed updated earnings and capital sensitivities to a possible further downturn of financial markets. In particular, this additional information pertained to equity market exposure, impairments and interest rate movements. 

Given market developments and the ongoing uncertainty regarding the financial and economic environment, Aegon felt it was prudent to reinforce its capital buffer to a level substantially in excess of its AA capital adequacy requirements. On October 28, Aegon announced that it had secured EUR 3 billion of additional core capital from Vereniging Aegon funded by the Dutch State.  

Capital preservation

As the financial crisis unfolded, acceleration of capital preservation actions has been a priority. The actions taken and plans to be executed are evidence of the financial flexibility within Aegon to manage through these extraordinary times. They include:

  • Releasing EUR 1.7 billion of capital in the second half year of 2008, including EUR 1 billion in the fourth quarter, by actively reducing risks -  including investment risks, optimizing asset and liability management, reinsurance transactions and securitization;
  • Releasing an additional EUR 1.5 billion of capital in 2009 by lowering investment risk, and transferring risk through reinsurance;
  • Reducing spread-based balances within Aegon’s  institutional business in the United States by EUR 14 billion, freeing up EUR 0.6 billion of capital in the next two years (EUR 0.3 billion in 2009, which is included in total expected capital releases for 2009 of EUR 1.5 billion).

The capital preservation actions in Q4 2008 of EUR 1 billion are expected to have a negative effect on earnings of EUR 60 million on an annual basis. As these actions are largely derisking measures, they can be reversed at any time.

As a result of actions taken, the capital position of the company remains strong with excess capital of EUR 2.9 billion over AA capital adequacy requirements at year-end, a significant buffer against further market deterioration.  

Cost measures

Aegon announced cost reduction measures totaling EUR 150 million in 2009. Actions to achieve this include:

  • Americas: no wage increases in 2009, staff reductions, deferred hiring, reorganization of the agency distribution, downsizing IMD;
  • The Netherlands: reduction of contract services, process reengineering, general cost savings;
  • United Kingdom: restructuring of IT and marketing and customer services, cost containment, savings in distribution. 

Capital management and capital position

Aegon capitalizes its businesses at the higher of:

  • Regulatory requirements;
  • AA capital adequacy requirements;
  • Any self-imposed additional economic requirements under Aegon’s economic framework.

Aegon has EUR 2.9 billion excess capital over AA capital adequacy requirements and has an IGD capital surplus of EUR 5.6 billion, equivalent to an IGD solvency ratio of 183% (2007: 190%). Regulatory requirements are set by local regulators, while the IGD ratio is a European regulatory solvency calculation. The methodology to calculate the IGD ratio has changed from the disclosure over the third quarter results to better reflect regulatory solvency requirements of the respective local regulators. The previously disclosed IGD ratio included the calculation of the ratio for the businesses outside of the EU based on EU Solvency I capital requirements. The IGD ratio now takes into account Solvency I capital requirements on IFRS for entities within the EU, and local regulatory solvency measurements for non-EU entities. Specifically, required capital for the life insurance companies in the United States is calculated as two times the upper end of the Company Action Level range (200%) as applied by the National Association of Insurance Commissioners in the United States. Aegon does not manage its capital base to the IGD ratio. Aegon USA had a NAIC RBC ratio of 350%, compared with 336% at the end of 2007.

Core capital at year-end came in at EUR 9.1 billion, consisting of EUR 6.1 billion of shareholders’ equity and EUR 3 billion of convertible core capital securities provided by Vereniging Aegon, funded by the Dutch State. Core capital includes a negative revaluation account on available-for-sale assets of EUR 7.2 billion. Excluding the revaluation account, core capital amounted to EUR 16.2 billion, 78% of the total capital base, above the minimum target of 70%.

Aegon’s negative revaluation account increased during the fourth quarter by EUR 1.7 billion, the result of unprecedented credit spread widening, more than offsetting the effect of declines in government bond yields.

Aegon has not reclassified assets held as available-for-sale (AFS) to loans or held-to-maturity assets. Also, Aegon transferred a very limited amount of assets valued based on market prices to mark-to-model valuations, driven by current market developments. The mark-to-model is now 1.1% (EUR 1.1 billion) of the total valuation of debt instruments held at fair value (2007: 0.4%). For more details we refer to the explanatory notes on page 36.

The lower valuation of the AFS bond portfolio will only affect earnings before tax if Aegon:

  • Is forced to sell those investments at a loss; or
  • Impairs certain investments because the company does not expect to receive (part of) interest and/or principal.

Aegon’s long-term business model, and its liquidity and asset and liability management, ensure that it is unlikely that Aegon will be forced to sell assets at distressed prices, as reflected in the revaluation account, to generate cash. Therefore, Aegon’s negative revaluation reserve is not a good indication of future losses. Aegon expects impairments will be at elevated levels in 2009, due to the economic situation. 

Financial highlights

Use this link for the table financial overview

Operational highlights


Aegon reported a net loss for Q4 of EUR 1.2 billion. Results are in line with preliminary results announced on February 17, 2009 and were significantly impacted by financial markets.

Underlying earnings were down mainly due to declining financial markets, resulting in reserve strengthening and accelerated amortization of deferred policy acquisition costs (DPAC) in the variable annuities line of business in the Americas and reduced fees on asset balances in general.

Net income was also down due to increased impairment charges and the impact of financial markets on so-called fair value items, which include certain investment classes in the Netherlands and the Americas, as well as a number of products containing financial guarantees. Lower equity and credit markets, as well as increased implied volatilities and lower interest rates severely impacted the fair value of guarantees in these products. In addition, alternative investment classes, like hedge funds and private equity, significantly underperformed long-term expected returns.

Impairments came primarily from housing related structured assets, corporate high-yield bonds and equity investments. The impairments on corporate credit were driven by a number of small impairments.

Net income also includes an extraordinary tax charge of EUR 300 million, related to intercompany reinsurance treaties between Ireland and the United States, offsetting the tax benefit from the reported operational losses. These reinsurance treaties are accounted for at fair value in both tax jurisdictions, while gains in the United States are taxed at 35% and losses in Ireland are tax deductible at 12.5%. 

Underlying earnings before tax

In Q4 the underlying loss for the company amounted to EUR 181 million.

Underlying earnings in the Americas came in at a negative USD 412 million. The impact on earnings from lower equity markets of USD 839 million mainly affected:

a) The variable annuity business (USD 587 million) due to minimum guarantee reserves strengthening and accelerated amortization of DPAC and lower fees;

b) The life reinsurance business as result of reserve strengthening of variable annuity blocks of business (USD 150 million); and

c) The life business (USD 65 million).

Underlying earnings in the Americas in Q4 also included USD 230 million of one-off charges, the most significant being an increase in the long-term assumption for equity market volatility (USD 145 million). Earnings also include a charge of USD 40 million related to intangible assets from the acquisition of Merrill Lynch’s life insurance businesses, and a USD 45 million asset write-off in life reinsurance. In Q4 2007, underlying earnings in the Americas included a positive USD 52 million from updated mortality assumptions in the life business.

In the Netherlands, underlying earnings were down 31% to EUR 75 million. The positive impact of an exceptional dividend received and better technical results in the pension business in the Netherlands was more than offset by decreases in investment income as well as charges in other lines of business. These charges include adverse technical results in the non-life business, system and project related one-off expenses and restructuring charges.

Underlying earnings in the United Kingdom, meanwhile, were GBP 13 million, a decline of GBP 34 million due primarily to the impact of lower equity and credit markets on fee charges in the pension business. Other lines of business in the United Kingdom performed well.

The decline in underlying earnings from Other countries to a loss of EUR 17 million was the result mainly of accelerated amortization of deferred acquisition costs in Taiwan (EUR 43 million), as underlying earnings in Central & Eastern Europe increased 87% to EUR 28 million and in Spain 11% to EUR 10 million. 

Net income

Net income includes results on so-called fair value items, which include certain investment classes in the Netherlands and the Americas, as well as a number of products containing financial guarantees. The total underperformance of these fair value items amounted to EUR 770 million. The valuation of the fair value of liability guarantees reflects decreased interest rates, declining equity markets and sharply increased equity volatilities, as well as discount rates including a credit spread, a reflection of extremely dislocated and very illiquid markets. 

Underperformance of fair value items

In Q4 2008, underperformance of alternative investment classes, such as hedge funds, private equity and credit derivatives, in the Americas and the Netherlands amounted to EUR 500 million.

Fair value items include the under/overperformance on assets held at fair value through profit and loss and backing liabilities of a specific portfolio of group pension contracts in the Netherlands. In Q4 these assets underperformed long term expected returns by EUR 149 million.

In order to maintain consistency in definitions, starting in Q4 2008, the net impact of the fair value movements of guarantees and the related hedges in the Netherlands has been included in fair value items. Previously, differences in fair value between guarantees and related hedges, referenced as hedge ineffectiveness, were reported in gains/losses on investments. Results for prior years have been adjusted (see Financial supplement Q4 2008).

Lower bond and equity markets, as well as higher volatilities and lower interest rates negatively impacted the performance of certain products with guarantees reported at fair value. Those negative impacts were partly offset by a credit spread in the discount rates, a reflection of extremely dislocated and very illiquid markets. Products with guarantees at fair value contributed a total negative EUR 139 million to earnings. This includes mainly:

  • Net fair value losses on GMWB guarantees and related hedges in the Americas and the United Kingdom (EUR 280 million), segregated funds in Canada (EUR 201 million) and total return annuities (EUR 82 million);
  • Partially offset by EUR 425 million positive impact from hedge ineffectiveness in the Netherlands.

Effectiveness of hedging was affected by extreme volatility in Q4, while higher implied volatilities impacted the valuation of guarantees. 

Gains on investments

Gains on investments of EUR 136 million include primarily gains on derivatives considered as economic hedges at holding level and the Netherlands as well as realized gains on the sale of bonds, offset by lower real estate values in the Netherlands. 

Impairment charges

Impairments of EUR 501 million included EUR 360 million on bonds/mortgages, primarily structured assets (subprime bonds EUR 100 million) and a number of corporate bonds in the Americas (EUR 158 million), as well as equity impairments (EUR 141 million). The impairments in corporate credit were driven by a number of small impairments. Equity investments are impaired when market values are 20% below cost price or when they are in an unrealized loss position for more than six months. 


The tax benefit from the underlying loss, impairments and mark-to-market losses on the fair value items is more than offset by significant additional taxes related to cross border intercompany reinsurance transactions (EUR 300 million). These reinsurance treaties are accounted for at fair value in both tax jurisdictions, while gains in the United States are taxed at 35% and losses in Ireland are tax deductible at 12.5%. The driver of the tax losses in Ireland is credit spread widening. These tax losses are largely expected to reverse as the book matures and when credit spreads narrow. 

Commissions and expenses

Commissions and expenses increased by 30% to EUR 1,863 million, primarily due to acceleration of DPAC amortization. Operating expenses increased by 7% to EUR 928 million, including several one-off items such as restructuring charges, redundancy charges and provisions.  


Total new life sales for the company were in line with Q3 2008, and decreased by 19% (at constant currency) to EUR 598 million compared to Q4 2007. With the exception of the UK and Spain, all countries recorded lower sales in Q4 compared to Q4 2007.

New life sales in the Americas were down 43% in local currency, particularly due to lower bank-owned and corporate owned life insurance (BOLI/COLI) sales (down 83%). Economic conditions also affected the high net worth market as well as variable universal life sales in the middle market.

In Q4 2008 new life sales in the Netherlands decreased by 44% in local currency, primarily due to a 57% decline in pension sales, as Q4 2007 included several large contracts, while retail life sales held up reasonably well. New life sales in the United Kingdom increased by 5%, mainly driven by growth in the corporate pension market and individual annuities, offset by lower individual pension sales.

New life sales in Q4 declined 34% to EUR 58 million in Other countries. In Central & Eastern Europe, sales of recurring premium life insurance rose 13%. Single premium sales in Poland were sharply lower because of a decline in equity markets, driving down total new life sales in Central & Eastern Europe by 27%.

In Spain, sales of life insurance rose to EUR 23 million, due primarily to extraordinary activity, following changes in pension legislation. Sales through CAM, Aegon’s largest bank partner in Spain, tripled to EUR 77 million (on a 100% basis), as a result of a successful strategy to increase the insurance penetration ratio among their existing client base. In Asia, new life sales decreased to EUR 13 million as increased sales in China were more than offset by a decline in Taiwan.

Use this link for the table Sales


Total gross on and off balance deposits for the company increased by 24% to EUR 11.9 billion in Q4. The increase is mainly a result of the continued growth in fixed annuity deposits and strong demand for synthetic guaranteed investment contracts (GICs) in the Americas during Q4 2008. In the pension business in the Americas, sales of retirement plans held up well. Variable annuity sales as well as asset management and mutual fund sales declined due to the volatility in the equity markets in Q4 2008. Sales of on balance guaranteed investment contracts in Q4 2008 increased by 46% in local currency. Aegon sees limited opportunities to grow spread-based business profitably in the foreseeable future and announced on February 17, 2009, its decision to downsize the portfolio of institutional spread-based products.

Gross deposits in Central & Eastern Europe increased 18%. Higher pension deposits in all country units, reflecting growth of the business as well as the incorporation of new acquisitions, were partly offset by lower production of mutual funds and third party asset management products in Hungary due to the decline of equity markets.

Deposits in Asia increased by EUR 148 million due to the newly acquired asset management business in China. Net deposits for the company amounted to EUR 1.7 billion as a result of strong fixed annuity and synthetic guaranteed investment contracts deposits, partly offset by net outflows of savings deposits in the Netherlands. In Central & Eastern Europe, the pension business continued to report strong net inflows.


a) The calculation of the IGD (Insurance Group Directive) capital surplus and ratio have been changed from the disclosure in the previous quarter to better reflect regulatory solvency requirements of local regulators and are based on Solvency I capital requirements on IFRS for entities within the EU, and local regulatory solvency measurements for non-EU entities. Specifically, required capital for the life insurance companies in the US is calculated as two times the upper end of the Company Action Level range (200%) as applied by the National Association of Insurance Commissioners in the US
b) National Association of Insurance Commissioners Risk Based Capital
c) Core capital is the sum of shareholders’ equity and the EUR 3 billion in convertible core capital securities from Vereniging Aegon, funded by the Dutch State