Aegon Announces Strong Q4 2010 Results

Strong earnings, sales and capital position

• Underlying earnings before tax in Q4 up 2% to EUR 489 million, bringing the total for 2010 to EUR 2 billion
• Net income in Q4 of EUR 318 million resulting in a net profit for the year of EUR 1.8 billion 
• New life sales stable at EUR 558 million; full year sales up 5% to EUR 2.2 billion
• Gross deposits increased 16% to EUR 7.8 billion adding to a total of EUR 32.6 billion in full year deposits
• Excess capital* of EUR 3.8 billion, of which EUR 1.7 billion at the holding; IGD_^a) solvency ratio of 198%

Repurchase all remaining convertible core capital securities by end of June 2011

• Today’s 10% equity issue will fund part of EUR 2.25 billion required for repurchase, allowing Aegon to maintain its strong capital position and to achieve the targeted 75% core capital ratio by year-end 2012
• Remaining amount generated from internal resources, including any proceeds from divestments

Sustainable earnings growth with an improved risk-return profile

Aegon is well on track with its transformational process and aims to deliver sustainable earnings growth with an improved risk-return profile. However, underlying earnings and other key metrics in 2011 will be affected by strategic management actions. From this new base, the company announces specific targets today which reflect Aegon's pursuit of these objectives:

• Grow underlying earnings before tax on average by 7 to 10% per annum
• Achieve a return on equity of 10% to 12% in the medium term
• Increase fee businesses to 30% to 35% of underlying earnings before tax by 2015
• Increase normalized operational free cash flow14 with 30% by 2015
• Intent to resume dividend payments with dividend of  EUR 0.10 per common share related to H2 2011 in May 2012

Statement of Alex Wynaendts, CEO
“Aegon has delivered a strong set of results for the full year 2010. During the year, we have concentrated our efforts on executing a consistent strategy aimed at sharpening our focus on our core business, improving our risk-return profile and executing significant cost reduction programs. As a result of our efforts over the past years, Aegon is a different company today. Today’s equity offering, together with internal resources, including proceeds from divestments, will position us to repurchase all remaining core capital securities provided by the Dutch State by the end of June 2011. The equity offering supports our strategy to maintain a strong capital position, including achieving our target ratio of 75% core capital by the end of 2012. After completing the repurchase, we intend to resume dividend payments in May 2012. Aegon has demonstrated its ability to deliver and we are committed to delivering the long-term value that our customers, shareholders and business partners have every reason to expect.”

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

STRATEGIC HIGHLIGHTS

• Aegon announces targets to deliver sustainable earnings growth with improved risk-return profile
• Sharpened focus on core activities and capturing efficiencies in US
• Integration of Asian businesses under leadership of new CEO Aegon Asia

 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.

Pursuing sustainable earnings growth with an improved risk-return profile
Aegon will pursue sustainable earnings growth, underpinned by an improved risk-return profile and a strong capital position, with the objective of sustainable cash flows and dividends. Aegon has announced specific targets which reflect the company's pursuit of these objectives.

Underlying earnings before tax in 2011 are expected to be negatively impacted by strategic management actions; the wind-down of small bank BOLI and COLI and the potential divestment of Transamerica Reinsurance. In addition, pension legislation changes in Hungary and Poland are expected to negatively impact underlying earnings.

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 a result, Aegon is currently reviewing its strategic options for its life reinsurance business, Transamerica Reinsurance.

As announced in December 2010, Aegon decided to discontinue new sales of executive non-qualified benefit plans and related small bank Bank-Owned and Corporate-Owned Life Insurance (BOLI/COLI) business in the United States. In 2010, underlying earnings before tax from BOLI/COLI amounted to EUR 49 million. As of the first quarter of 2011, earnings from the BOLI/COLI business will no longer be reported in underlying earnings but in the run-off category.

In Spain, Aegon has signed an agreement to expand its life insurance and pension partnership with Banca Cívica. The agreement includes the acquisition of a 50% stake in the life insurance business of Caja de Burgos and a strengthening of Aegon’s existing partnership with Caja Navarra. Caja de Burgos, Caja Navarra and two other savings banks, Caja Canarias and CajaSol, joined together in 2010 to form Banca Cívica. The agreement will give Aegon the exclusive right to distribute its life insurance and pension products through Caja de Burgos’s network of 148 branches. Caja de Burgos is the leading savings bank in Spain’s northern province of Burgos, with a significant presence in the surrounding areas and more than 550,000 customers. The agreement is subject to various conditions and approvals, including authorization by the European Commission.

Improve risk profile
Aegon has recently further increased equity hedging on its back-book in the Netherlands by extending its current equity hedge program.

During the fourth quarter, Aegon further reduced its already limited exposure to peripheral European sovereign bonds, based on fair value, from EUR 1.5 billion to EUR 1.1 billion at December 31, 2010.

Increase returns
Aegon’s aim is to increase returns in all of its businesses by increasing efficiency and delivering operational excellence. Aegon expects to achieve this by further reducing costs while investing in core competences and improving service levels to ensure continued customer loyalty.

In the United States, Aegon will pursue further operational and cost efficiencies by consolidating its operations currently based in Louisville, Kentucky with other existing US locations. Additional efficiencies are also being captured through the consolidation and outsourcing of certain back office activities currently carried out in Cedar Rapids, Iowa.

In the United Kingdom, Aegon is taking significant steps to improve its return on capital. Aegon is on track to reduce costs by 25% in its UK life and pensions operations by the end of 2011, and is directing more resources to the key growth
At-Retirement and Workplace Savings markets, where Aegon has leading positions. The restructuring program is progressing well and of the targeted reduction in operating expenses of GBP 80 to 85 million annually, already GBP 33 million has been enacted in 2010.

Optimize ONE Aegon
Aegon will implement a new organizational structure for its operations in Asia under the leadership of a newly-established CEO position for Asia. Whereas a number of Aegon’s businesses in Asia previously had been managed from the US, under the new structure all Asian based insurance businesses will be managed as one regional division headquartered in Hong Kong. The aim is to leverage product and distribution expertise, capture efficiencies, and pursue organic growth of Aegon’s franchise in Asia. The integration, which will be carried out during 2011, is in line with Aegon’s strategy to achieve a greater geographical balance in favor of those regions and markets that offer higher growth and returns in the longer-term.

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 to EUR 489 million in the fourth quarter, a 2% improvement compared with the same quarter last year.

In the Americas, underlying earnings rose to EUR 406 million as higher fee income – related to growth in pension and variable annuity account balances – more than offset lower spread income. This was consistent with Aegon’s strategy to increase earnings from fee businesses. Earnings from the Americas included a one-time EUR 28 million favorable employee benefits plan release. In the Netherlands, underlying earnings decreased to EUR 87 million as a result of lower investment income and lower results on mortality. In the United Kingdom, underlying earnings amounted to a loss of EUR 6 million, due to a EUR 30 million charge related to an ongoing program to correct historical issues within customer policy records. Underlying earnings from New Markets increased to EUR 59 million as a result of the inclusion of Aegon Asset Management. Higher funding costs and increased project related expenses resulted in EUR 57 million of costs in the fourth quarter of 2010 for the holding company.

Net income
Net income decreased to EUR 318 million. This was primarily the result of higher underlying earnings, a positive contribution from fair value items and lower impairments offset by lower realized gains and charges mainly related to restructuring in the United States.

Fair value items
In the fourth quarter, results from fair value items amounted to EUR 30 million. In the Americas, most categories showed considerable improvements compared with the fourth quarter 2009, while in the Netherlands the improved results were driven by the fair value of guarantees net of related hedges and better private equity performance.

Realized gains on investments
Realized gains on investments increased to EUR 255 million, primarily as a result of an asset sale of multiple mineral estates located primarily in the Western United States (EUR 183 million). The remainder was realized mainly as a result of normal trading in Aegon’s bond portfolios.

Impairment charges
Impairments amounted to EUR 133 million and were mostly linked to US residential mortgage-backed securities, US commercial mortgage loans and Irish banks.

Other charges
Other charges amounted to EUR 258 million and consisted of a number of items. In the United States, the wind-down of small bank BOLI and COLI business and the consolidation of the Louisville operations with other existing US locations as announced in December 2010 resulted in a charge of EUR 206 million.

Consolidation of Aegon’s asset management operations led to a EUR 12 million restructuring charge.

A restructuring program is ongoing in the United Kingdom to achieve a 25% cost reduction by the end of 2011. This led to a charge of EUR 6 million in the fourth quarter of 2010.

In Hungary, unfavorable pension legislation changes resulted in a write-down of intangibles of EUR 18 million and a EUR 5 million restructuring charge related to the Hungarian pension operations. In addition, a bank tax in Hungary led to a charge of EUR 5 million.

Run-off businesses
Aegon’s run-off businesses in the Americas recorded a loss of EUR 28 million, an improvement over the comparable period last year primarily due to lower account balances and less amortization yield paid on internally transferred assets.

Income tax
Tax charges for the quarter amounted to EUR 37 million. These charges included EUR 17 million in tax benefits related to cross-border intercompany reinsurance transactions and tax benefits of EUR 51 million resulting from the utilization of tax losses for which previously no deferred tax asset was recognized.

Operating expenses
Operating expenses increased 8% compared with the fourth quarter 2009 to EUR 909 million, mainly due to strengthening of the dollar and pound sterling against the euro. However, operating expenses declined 2% during 2010, excluding currency effects, restructuring and US employee benefit plan charges.

New life sales
New life sales for the fourth quarter amounted to EUR 558 million, which was the same level achieved during the comparable quarter last year. Higher sales in the Netherlands as a result of strong pensions sales and continued strong single premium production in Central & Eastern Europe were offset by declines in the Americas and the United Kingdom.

Deposits
Gross deposits, excluding run-off businesses, increased 16% to EUR 7.8 billion driven by US pensions, variable annuities and Aegon Asset Management.

As a result of outflows from fixed annuities and stable value solutions in the US and the Dutch savings business, total outflows for the fourth quarter 2010 amounted to EUR 0.5 billion. For the full year, however, Aegon recorded EUR 5 billion in net deposits driven by strong asset management and US pension sales.

Value of new business
Compared with the fourth quarter 2009, the value of new business declined considerably to EUR 141 million, mainly as a result of the strategic shift from spread to fee business. In the Americas, the value of new business declined as a result of lower sales of fixed annuities and life reinsurance products and lower margins. In the United Kingdom, the main reason was a decrease in immediate annuity sales and margins. In the Netherlands the positive effect of higher pension sales was more than offset by lower margins for life insurance.

Revenue-generating investments
Revenue-generating investments increased 2% compared with the end of the third quarter 2010 to EUR 413 billion, primarily as a result of higher equity markets.

Capital management
At the end of the fourth quarter, Aegon’s core capital position amounted to EUR 17.8 billion, excluding revaluation reserves. This was equivalent to 75%7 of the company’s total capital base. Repurchase of the Convertible Core Capital Securities issued to the Dutch State will decrease this capital base ratio. However, Aegon aims to bring the proportion of core capital up to at least 75% of total capital by the end of 2012.

The revaluation reserves at December 31, 2010 declined compared with the end of the third quarter to EUR 1 billion, as an increase in risk-free interest rates had a negative impact on the value of fixed income securities. Shareholders’ equity declined to EUR 17.2 billion, as the earnings contribution and positive currency effects were more than offset by lower revaluation reserves.

During the fourth quarter, excess capital rose to EUR 3.8 billion. Excess capital in the holding increased to EUR 1.7 billion as a result of dividend payments received from the operating units, while the units were able to increase their excess capital position to EUR 2.1 billion as a result of capital generated in the operations of EUR 1 billion partly offset by new business strain of EUR 0.4 billion. Excess capital was negatively impacted by a lower than expected charge in the Netherlands for longevity of EUR 225 million.

Aegon has agreed with its regulator, the Dutch Central Bank (DNB), that in the current environment it will maintain a capital buffer at the holding of 1.5 times its annual holding expenses. Currently, these holding expenses amount to EUR 0.6 billion on a normalized annual basis, which in effect means a buffer of EUR 0.9 billion for the holding.

At December 31, 2010, Aegon’s Insurance Group Directive (IGD) ratio amounted to 198%. Higher regulatory solvency in the United States and the United Kingdom was offset by the Netherlands as result of a charge for longevity.

Dividend policy
Aegon aims to pay out a sustainable dividend to allow equity investors to share in the performance of the company, which can grow over time if performance of the company so allows. After investments in new business to generate organic growth, capital generation in Aegon’s operating subsidiaries is available for distribution to the holding company, while maintaining a capital and liquidity position in the operating subsidiaries in line with Aegon’s capital management and liquidity risk policies.

Aegon uses cash flows from the operating subsidiaries to pay for holding expenses, including funding costs. The remaining cash flow is available to execute Aegon’s strategy and to fund dividends on its shares, subject to maintaining the holding company targeted excess capital. Depending on circumstances, future prospects and other considerations, Aegon may deviate from this target. Aegon will also take capital position, financial flexibility, leverage ratios and strategic considerations into account when declaring or proposing dividends on its common shares.

Under normal circumstances, Aegon would expect to declare an interim dividend when announcing its second quarter results and to propose a final dividend at the Annual General Meeting of Shareholders for approval. Dividends would normally be paid in cash or stock at the election of the shareholder. The relative value of cash and stock dividends may vary. Stock dividends paid may, subject to capital management and other considerations, be repurchased in order to limit dilution.

Aegon intends to resume dividend payments on its common shares after the full repurchase of the core capital securities issued to the Dutch State, which Aegon expects to occur before the end of June 2011. Absent unforeseen circumstances, Aegon intends to propose a final EUR 0.10 dividend per common share at the annual General Meeting of Shareholders in 2012 covering the second half of 2011.

When determining whether to declare or propose a dividend, Aegon has to balance prudence versus offering an attractive return to shareholders, for example in adverse economic and/or financial market conditions. Also, Aegon’s operating subsidiaries are subject to (local) insurance regulations which could restrict dividends to be paid to the holding company. There is no requirement or assurance that Aegon will declare and pay any dividends.

^{Cautionary note regarding non-GAAP measures
This press release includes certain non-GAAP financial measures: underlying earnings before tax, net underlying earnings, commission and expenses, operating expenses and value of new business (VNB). The reconciliation of underlying earnings before tax to the most comparable IFRS measure is provided in Note 3 "Segment information" of our Condensed consolidated interim financial statements. VNB is not based on IFRS, which are used to report Aegon's primary financial statements, and should not be viewed as a substitute for IFRS financial measures. We may define and calculate VNB differently than other companies. Please see Aegon’s Embedded Value Report dated May 12, 2010 for an explanation of how we define and calculate VNB. Aegon believes that these non-GAAP measures, together with the IFRS information, provide meaningful supplemental information that our management uses to run our business as well as useful information for the investment community to evaluate Aegon’s business relative to the businesses of our peers.}

^{Local currencies and constant currency exchange rates
This press release contains certain information about our results and financial condition in USD for the Americas and GBP for the United Kingdom, because those businesses operate and are managed primarily in those currencies. Certain comparative information presented on a constant currency basis eliminates the effects of changes in currency exchange rates. None of this information is a substitute for or superior to financial information about us presented in EUR, which is the currency of our primary financial statements.}