Alex Wynaendts, CEO: "Aegon's improved capital position, the strength of our franchise and return to profit in the third quarter are evidence that the actions we initiated a year ago were the right ones at the right time."
Underlying earnings before tax of EUR 351 million, impacted by lower equity markets, de-risking measures and EUR 66 million of exceptional charges
Improved fair value items as result of rising financial markets, offset by equity hedging
Lower impairments of EUR 285 million: substantially lower impairments on US housing market related assets Cost savings measures target for 2009 of EUR 150 million achieved
Continued profitable sales, evidence of a strong franchise
New life sales of EUR 484 million, supported by a 11% increase in US retail sales
Net deposits, excluding institutional guaranteed products, of EUR 2 billion due to strong sales of pensions, increased savings deposits and improved persistency
VNB of EUR 169 million
Further strengthened capital position
EUR 0.9 billion in capital freed up in Q3, including recent capital management transaction of USD 650 million
Excess capital of EUR 4.8 billion by end September, including the equity offering of EUR 1 billion
Repayment of EUR 1 billion on November 30 by repurchase of 250 million convertible core capital securities
Revaluation reserves improved by EUR 3.3 billion, mainly a result of narrowing credit spreads
IGD a) solvency ratio increased further to 211%
Statement Alex Wynaendts, CEO
Aegon's improved capital position, the strength of our franchise and return to profit in the third quarter are evidence that the actions we initiated a year ago were the right ones at the right time. On November 30 we will repay EUR 1 billion to the Dutch government, an important first step toward full repayment of the capital support Aegon received last year. We are pleased that our strong capital position has enabled us to take this step while continuing to maintain a larger capital buffer, a necessary precaution in the current environment. We are also encouraged by the improved sales and net deposits for the quarter and the continued confidence of our customers. Moreover, we have achieved our full-year cost savings target of EUR 150 million and further reduced Aegon's risk to financial markets. Aegon today is in a strong position and we remain committed to further executing our strategy to position our businesses for long-term growth and profitability.
For footnotes see related documents for the full version press release.
Strategic highlights and short-term priorities
Aegon has set out three long-term strategic priorities: 1. To reallocate capital toward businesses with higher growth and return prospects; 2. To improve growth and returns from existing businesses; 3. To manage Aegon as an international company.
Aegon further aims to reduce its earnings sensitivity to financial markets to generate more stable earnings going forward.
Aegon continues to assess its businesses to ensure they meet requirements in terms of earnings growth, cash flow and return on capital potential. As a result of this portfolio review Aegon is running off its institutional spread-based and auto credit businesses in the US, its group risk business in the UK, and has sold its Taiwanese life insurance operations.
Aegon made further progress in implementing cost saving measures and has achieved its 2009 target of EUR 150 million. Operating expenses for the first nine months of 2009 declined by 5%, excluding the impact of restructuring charges, increased employee benefit plan expenses and currency effects.
Recently, Aegon announced that it will reorganize its Dutch sales organization, which will result in an annual cost savings of EUR 15 million. This reorganization involves compulsory redundancies and will result in a charge of EUR 20 million.
During Q3 2009, a further EUR 0.9 billion of capital was released from Aegon’s businesses, bringing the total for the first nine months of 2009 to EUR 2.5 billion and EUR 4.2 billion since the initiation of the capital preservation program in June 2008.
Capital & risk management
Excess capital above AA capital adequacy requirements amounted to EUR 4.8 billion, up from EUR 3.5 billion at the end of Q2 2009. In normal circumstances Aegon aims to maintain an excess capital of EUR 1.5 to 2 billion. However, in the current environment Aegon aims to maintain a substantially larger capital buffer.
De-risking and capital efficiency measures totaling EUR 0.9 billion and statutory earnings of EUR 0.4 billion further added to Aegon’s excess capital position, partly offset by rating migration in the United States of EUR 0.2 billion, impairment charges of EUR 0.2 billion and other items. Aegon has included in its Q3 2009 results the recently announced capital management transaction that releases approximately USD 650 million of additional regulatory capital to its US operations.
Aegon successfully completed a EUR 1 billion equity issue on August 13, 2009. The proceeds of which will be used to repay one-third of the EUR 3 billion of core capital the company secured last year through its largest shareholder, Vereniging Aegon and funded by the Dutch State. As announced, Aegon will repay this EUR 1 billion on November 30.
IFRS core capital
At the end of September 2009, core capital, excluding the revaluation reserves, totaled EUR 16.4 billion or 80% of the total capital base, well above Aegon’s self-imposed minimum target of 70%7,8.
Core capital, including the revaluation reserve, amounted to EUR 14.6 billion, consisting of EUR 11.6 billion in shareholders’ equity and EUR 3 billion in convertible core capital securities.
Aegon’s revaluation reserves improved by a significant amount of EUR 3.3 billion, during Q3 2009 to a negative EUR 1.8 billion at September 30, 2009. Approximately 85% of the improvement of the revaluation reserves is related to the narrowing of credit spreads and approximately 15% is the result of lower risk-free interest rates.
Aegon recently submitted a plan, through the Dutch Ministry of Finance, to the European Commission to demonstrate that its businesses are fundamentally sound and viable. This plan is a requirement for all financial institutions that received state support during the financial crisis. The timing and outcome of this process have not been specified.
Improved risk profile
To reduce Aegon’s sensitivity to financial markets, Aegon has substantially reduced its equity and credit market risk. In addition, Aegon lowered its long-term interest rate risk by selling the Taiwanese life insurance business.
Equity market sensitivity During Q3 2009, Aegon further reduced exposure to equity markets by hedging 50% of the indirect equity exposure embedded in guarantees within its Dutch business, using futures and limiting future earnings volatility.
Credit market sensitivity As a result of the decision to reduce sensitivity to financial markets, Aegon is running off its institutional spread-based business, reducing its exposure to credit risk. By the end of 2010, these balances will have decreased by approximately USD 20 billion, freeing up approximately USD 0.8 billion of capital.
In order to fund these outflows, assets from the institutional spread-based business have been transferred internally to other businesses in the United States in exchange for cash. As a result, the institutional spread-based business realizes a negative spread on these assets which negatively impacts underlying earnings. In the first nine months of 2009, Aegon has reduced its institutional spread-based balances by USD 9 billion.
Following the compression of credit spreads, Aegon has decided to reduce its exposure to credit derivatives, further reducing Aegon’s earnings and capital volatility to financial markets.
Manage Aegon as an international company
Aegon’s new global asset management business formally started on October 1, combining its international asset management operations in one international organization.
A European data center was opened in the United Kingdom, bringing together the data centers from the United Kingdom and the Netherlands, saving costs and significantly improving efficiency.
To further improve marketing effectiveness, Aegon Scottish Equitable will be rebranded solely as Aegon. Brand awareness in the United Kindom has increased strongly since Aegon became the lead partner of British tennis.
Leveraging on expertise in the United States and the United Kingdom, further progress has been made in developing variable annuity products. Product launches are planned in Q4 both in the Netherlands and Japan.
In Q3 2009, underlying earnings before tax amounted to EUR 351 million. Underlying earnings were impacted by de-risking measures implemented to counter the effects of the financial crisis. These measures impacted Q3 earnings by approximately EUR 40 million. Underlying earnings were also impacted by lower equity markets and by several exceptional items (EUR 66 million). Excluding exceptional items, underlying earnings would have been EUR 417 million for the third quarter.
The exceptional items were:
Provisions related to a program to improve the consistency of customer records in the United Kingdom of EUR 43 million;
Accelerated amortization of deferred policy acquisition cost (DPAC) of EUR 23 million in the fixed annuity business, as a result of the internal asset transfers related to the run-off of the institutional spread-based business in the United States.
Underlying earnings in the Americas decreased 30% to USD 403 million compared with Q3 2008, as a result of lower product spreads, reduced fees from lower asset balances, increased employee benefit plan expenses and accelerated DPAC in the fixed annuity business. Product spreads in the Institutional spread-based business have been significantly reduced due to asset transfers to other US businesses in exchange for cash. In Q3 2008, the Americas results included DPAC charges related to variable annuities and unfavorable mortality experience for Life Reinsurance.
In the Netherlands, underlying earnings increased to EUR 102 million, or 38%, compared with Q3 2008, primarily the result of higher investment income in the life and pensions businesses.
In the United Kingdom, underlying earnings decreased compared to Q3 2008 to a loss of GBP 11 million. This was mainly the result of an exceptional charge of GBP 38 million related to a program to improve the consistency of customer records.
Underlying earnings from Other countries totaled EUR 42 million. Excluding the results of Aegon’s Taiwanese Life business, which was sold in Q2 2009, underlying earnings before tax were up 60%. This increase was mainly driven by improved results for CAM Vida, one of Aegon’s Spanish bank partners, and the Life business in Central & Eastern Europe (CEE).
Interest charges and other, included in underlying earnings before tax, represent holding expenses and amounted to a charge of EUR 69 million. The increase compared with Q3 2008 is mainly attributable to higher interest expenses.
Fair value items
In the Americas, fair value items showed an underperformance of USD 97 million (EUR 76 million). The overperformance of fair value assets, total return annuities, credit derivatives and GMWB guarantees, were more than offset by the result of Aegon’s equity hedge program related to its retail variable annuity portfolio in the United States which amounted to a loss of USD 252 million (EUR 184 million). In the Netherlands, fair value items over-performed by EUR 39 million due to the positive impact of movements in the fair value of guarantees and related hedges. Fair value items for the holding consist of three bonds issued by Aegon, which, together with related hedges, are held at fair value through profit or loss. Further narrowing of Aegon’s own credit spread during Q3 2009 resulted in a loss of EUR 27 million.
Results on investments
During Q3 2009, Aegon recorded losses on investments totaling EUR 100 million. Trading gains on the bond portfolios in the Netherlands and the United Kingdom were more than offset by trading losses in the Americas and depreciation of direct residential real estate investments in the Netherlands.
Net impairment charges decreased significantly compared with Q3 2008 to EUR 285 million. However, net impairments remained higher than Aegon’s average long-term impairment expectations. Impairments on US housing market related assets of EUR 74 million were considerably lower compared with previous quarters. In the United Kingdom impairments increased to EUR 80 million, related to corporate credit investments.
The third quarter of 2009 included a tax gain of EUR 154 million related to cross border intercompany reinsurance transactions between Ireland and the United States. These reinsurance transactions are accounted for at fair value in both tax jurisdictions. While losses in the United States were taxed at 35%, gains in Ireland were taxed at 12.5%. The tax gains related to these internal transactions, totaling EUR 399 million in the first nine months of 2009, are a partial reversal of the EUR 490 million of tax charges for the full year 2008.
Net income increased to EUR 145 million compared to a loss in Q3 2008, primarily the result of improved results of fair value items, lower impairment charges and the reversal of prior year tax charges.
Commissions and expenses
Operating expenses declined 2% in Q3 2009 compared with Q3 2008. Operating expenses for the first nine months of 2009 declined by 5%, excluding the impact of restructuring charges, increased employee benefit plan expenses and currency effects. Total commissions and expenses in the first nine months increased primarily as a result of higher DPAC amortization in the Americas related to lower equity markets in Q1 2009. Consistent with lower sales levels, fewer expenses were deferred and commissions decreased compared to the first three quarters of 2008.
New life sales
Total new life sales were up 3% compared with Q2 2009 to EUR 484 million as a result of higher single premium sales. In the Americas, retail life sales increased by 11% as a result of strong term life sales and higher universal life sales, while in the Netherlands the increase in sales was driven by group pension contracts. In the United Kingdom, sales declined, mainly as a result of the closure of the group risk business. In Central & Eastern Europe (CEE), new life sales increased 21% compared to Q2 2009, while in Spain sales declined during the quarter. In Asia sales were level with Q2 2009.
Total gross deposits, excluding institutional guaranteed products, increased to EUR 6.8 billion, or 20% compared with Q2 2009. The increase was the result of strong pension and retail mutual fund deposits in the United States, higher savings deposits in the Netherlands, new asset management contracts in the United Kingdom and higher mutual fund sales in China. As anticipated, gross deposits of fixed annuities were lower as crediting rates have been lowered, while variable annuity deposits declined in both the Americas and the United Kingdom. Net deposits, excluding institutional guaranteed products, increased to EUR 2 billion, mainly due to the large increase in deposits and improved persistency in pensions and asset management.
Value of new business
Value of new business amounted to EUR 169 million in Q3 2009, a decline of 7% compared with Q2 2009. VNB in the Netherlands increased as a result of higher sales volumes and improved margins, and in the Americas, VNB increased slightly in local currency. However, these increases were more than offset by declines in the United Kingdom and Other countries, as well as currency effects.
Revenue-generating investments increased to EUR 354 billion during Q3 2009, an increase of 4% compared with Q2 2009. This is the result of a further rise in equity markets combined with narrowing credit spreads and slightly lower interest rate levels in addition to net inflows.