Aegon withstands market turmoil with continued capital strength and resilient franchise

The challenging financial market conditions clearly impacted Aegon’s earnings during the third quarter.

Underlying earnings before tax of EUR 361 million

  • Compared with Q3 2010, earnings included the positive effect of updated assumptions (EUR 35 million) offset by effects of lower equity markets and interest rates (EUR 49 million), unfavorable currency movements (EUR 32 million) and higher provisioning for longevity (EUR 24 million)
  • Fair value items recorded a loss of EUR 288 million
    - Decision to lower interest rates assumptions resulted in charge of EUR 168 million
    - Other fair value items recorded EUR 120 million in losses due to lower interest rates and equity  markets, spread widening and increased volatility
    - Hedging programs performed well; higher reserve requirements fully offset by hedging results
  • Net income amounts to EUR 60 million
  • Return on equity of 6.9%, or 8.1% excluding run-off businesses

Strong gross deposits of EUR 10.5 billion; record net deposits* of EUR 4.4 billion

  • Total sales increase 2% to EUR 1.6 billion as a result of strong deposits
  • New life sales decline 18% to EUR 405 million due to product repricing following continued focus on margins
  • Accident & health sales increase 5% to EUR 153 million mainly driven by the Americas
  • Record deposits driven by pensions and variable annuities in the United States

Capital position remains strong; cash flows impacted by lower interest rates

  • Strong capital position demonstrated by IGD solvency ratio of ~190%
  • Excess capital of EUR 3.4 billion, of which EUR 1.2 billion maintained at the holding – well above target
  • Capital base ratio increases to 73.6% – on track to achieve ratio of at least 75% by the end of 2012
  • Operational free cash flows of EUR (678) million; higher reserve requirements due to lower interest rates

Statement of Alex Wynaendts, CEO

“The challenging financial market conditions clearly impacted Aegon’s earnings during the third quarter. Lower equity markets and the significant drop in interest rates, as well as a further weakening of the US dollar were the main drivers to the decline in underlying earnings. At the same time, Aegon’s capital position remained strong and our franchise continues to be resilient. Despite the difficult environment, we achieved record net deposits in our key growth businesses.

“In light of the continued low interest rate environment, we have revised our long-term interest rate assumptions which had a one-time significant negative impact on net income. It is clear that the actions we have taken to strengthen our balance sheet have enabled us to withstand the extreme market volatility we have seen in recent months, while also continuing to grow our business. Aegon today is in a strong position, with a solid capital position and the right strategy that will allow us to pursue our long-term ambitions.”

Please view the table Key performance indicators (for notes see page 22 of the full version).

* Excluding run-off businesses. 


  • Sale of closed UK life insurance business Guardian for a total consideration of GBP 275 million
  • Restructuring of Aegon The Netherlands accelerated to reduce cost base by EUR 100 million
  • Appointment of Simon Skinner as CEO of Aegon Ireland, Aegon’s European variable annuity platform

Sustainable earnings growth with an improved risk-return profile
Aegon continues to implement its transformational program aimed at delivering sustainable earnings growth with an improved risk-return profile. The company set the following targets*:

  • 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 businesses to 30%-35% of underlying earnings before tax by 2015; and
  • Increase normalized operational free cash flow by 30% by 2015.

Aegon’s ambition
Aegon’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.

* 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.


To be a leader in all our chosen markets by 2015


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

Optimize portfolio
In line with its strategic objective to optimize its portfolio of businesses, Aegon has decided to sell its UK-based Guardian life and pension business to Cinven, a European private equity group.

Guardian, which manages over 300,000 life insurance policies, has been closed to new business since 2001 and was sold for a total cash consideration of GBP 275 million, equivalent to approximately one time book value. Aegon Asset Management has entered into a long-term agreement with Cinven and will continue to manage the assets of Guardian which total GBP 7.4 billion. The transaction is expected to close in the fourth quarter of 2011.

In China, Aegon’s joint-venture with CNOOC opened its 10th regional branch in Fujian province, increasing its potential customer base to over 500 million people. Aegon-CNOOC is ranked among the top ten foreign insurance companies in China.

In Spain, Aegon is positioning itself to grow with some of its current partners and terminate its relationship with others. Recently, Aegon has closed an agreement with one of the Banca Cívica partnering savings banks, Caja Burgos, and has launched an exit process from its alliance with Caja de Ahorros del Mediterráneo (CAM), which has led to an arbitration process. Aegon will closely monitor the course of events regarding other bancassurance partners in Spain. 

Enhance customer loyalty
Aegon’s net promoter score (NPS) program is being rolled out across the group and brings the company closer to its goal of integrating NPS in many of its businesses and enhancing customer loyalty. Approximately half of Aegon’s businesses have begun using the program to gain direct customer feedback, respond to insights and adapt processes. Plans are in place to further increase the number of business units using NPS by the end of 2012 to support the company in its ambition of becoming the most recommended provider in the sector.

Deliver operational excellence
Aegon announced plans to make its business in the Netherlands more agile and better positioned to respond to changing conditions and opportunities in the Dutch market. The restructuring of Aegon's Dutch business is an acceleration of previously announced strategic plans. Restructuring charges of EUR 60 million are included in the third quarter 2011 earnings. 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 majority of the cost savings are expected to be achieved in 2012.

In the United Kingdom, Aegon is on track to implement a new operating model aimed at reducing costs by 25% by the end of this year. The program to restructure the business aims to deliver GBP 80 million in expense savings of which to date GBP 71 million has been implemented.

In India, Aegon Religare instituted automated underwriting and risk analysis. The new system improves turn-around time, minimizes human mistakes, cultivates efficiency and contributes to reduced implementation and recurring costs. The business won an award for companies that demonstrate strategic and operational excellence in information technology.

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


Underlying earnings before tax
Aegon’s underlying earnings before tax declined to EUR 361 million in the third quarter. The 20% decline, compared with the same quarter last year, was mainly due to lower interest rates and equity markets, unfavorable currency exchange rate movements and higher provisioning for longevity.

Underlying earnings from the Americas decreased to EUR 310 million. Consistent with Aegon’s strategy, earnings from fee-based businesses grew compared with the third quarter last year. However, they were more than offset by a weaker US dollar against the euro and lower earnings from fixed annuities as this line of business is de-emphasized. Earnings included the positive effect of updated assumptions of EUR 35 million mainly related to mortality.

In the Netherlands, underlying earnings decreased to EUR 68 million as a result of higher provisioning for longevity of EUR 24 million and investments in developing new distribution capabilities of EUR 5 million.

In the United Kingdom, underlying earnings declined to EUR 9 million. The third quarter included costs of EUR 14 million related to an ongoing program to correct historical issues within customer policy records and investments in developing new propositions (EUR 3 million). The company is on track to finalize the program in the fourth quarter of 2011. In addition, earnings of Guardian, the recently sold closed book of life insurance business, were no longer reflected in underlying earnings (EUR 6 million).

Underlying earnings from New Markets decreased to EUR 43 million, mainly as a result of lower earnings from Central & Eastern Europe due to lower investment income and the negative impact from pension legislation changes. In addition, the comparable quarter last year included a one-time benefit of EUR 5 million from Variable Annuities Europe.

Total holding costs amounted to EUR 69 million as net interest results were higher than in the comparable quarter a year ago. 

Net income
Net income decreased to EUR 60 million due mainly to a significant decline in results on fair value items.

Fair value items
To reflect current market circumstances, Aegon has lowered its long-term assumption for 10-year US Treasury yields by 50 bps to 4.75% (graded uniformly from current yields over the next five years) and lowered the 90-day rate to 0.2% for the next two years followed by a three year grade to 3%. No change has been made to the long-term credit spread or default assumptions. In addition, Aegon has lowered its assumed return for separate account bond fund returns by 200 bps to 4% over the next five years, followed by a return of 6% thereafter. The bond fund return is a gross assumption from which asset management and policy fees are deducted to determine the policyholder return. In total, these assumption changes led to a charge of EUR 168 million. In addition, lower interest rates, spread widening and lower equity markets affected other fair value items which resulted in losses of EUR 120 million. In total, fair value items recorded a loss of EUR 288 million during the third quarter. 

Realized gains on investments
In the third quarter, realized gains on investments amounted to EUR 102 million and were the result of normal trading in the investment portfolio and the divestment of the life reinsurance activities.

Impairment charges
Impairment charges amounted to EUR 132 million. In the United States, impairments of EUR 76 million were linked to residential mortgage-backed securities and in the United Kingdom to financial holdings of Portuguese and Greek banks (EUR 22 million). Impairments in New Markets of EUR 29 million were largely attributable to the effect of new legislation in Hungary, related to Swiss franc denominated mortgages, affecting the mortgage portfolio.

Other charges
Other charges amounted to EUR 54 million and are mostly related to restructuring provisions in the Netherlands (EUR 60 million) and in the United Kingdom (EUR 15 million). These charges are partly offset by UK policyholder tax with an equal and opposite charge in the tax income line of EUR 20 million.

Run-off businesses
The results of run-off businesses amounted to a loss of EUR 5 million as a lower amortization yield paid on internally transferred assets related to the institutional spread-based business and favorable mortality results for pay-out annuities were offset by lower results from BOLI/COLI and transaction costs related to the divestment of the life reinsurance activities.

Income tax
Net income for the quarter contained a tax benefit of EUR 76 million. A benefit of EUR 46 million in the United States related to the utilization of losses for which previously no deferred tax asset was recognized. In the United Kingdom, a benefit of EUR 24 million was recorded as a result of the tax rate reduction as per April 2012, enacted in July 2011.

Return on equity
In the first nine months of 2011, the return on equity of Aegon’s ongoing business amounted to 8.7%. Including capital allocated to the run-off businesses, return on equity amounted to 7.4%.

Operating expenses
In the third quarter, operating expenses increased 6% to EUR 886 million due mainly to higher restructuring charges. Excluding restructuring charges, employee benefit plans and at constant currencies, operating expenses increased 1% during the first nine months of 2011.

Sales and deposits
Aegon’s total sales increased 2% to EUR 1.6 billion mainly as a result of strong pension deposits. New life sales declined, mainly as a result of lower single premium production in the United Kingdom and the Americas following repricing of products, partly offset by growth in Central & Eastern Europe.

Gross deposits of EUR 10.5 billion were supported by increased pension and variable annuity deposits in the United States and continued strong third-party asset management inflows.

Value of new business
Compared with the third quarter 2010, the value of new business declined considerably to EUR 58 million, reflecting current market circumstances of lower interest rates and higher volatility and lower new life sales partly offset by higher deposits. Aegon prices its products on an economic framework basis and will start to publish value of new business on that basis as of the first quarter of 2012.

Revenue-generating investments
Revenue-generating investments rose 3% compared with the end of the second quarter of 2011 to EUR 404 billion. The positive effect of strong inflows and lower interest rates on asset balances was only partly offset by the effect of lower equity markets.

Capital management
In August, Standard & Poor’s positively revised their outlook on Aegon and its subsidiaries to stable from negative and affirmed the ‘AA-’ ratings on the core operating entities. At the same time, Moody’s affirmed the A3 senior debt of Aegon and upgraded the subordinated rating of Aegon to Baa1 from Baa2. Moody’s also upgraded the outlook on all ratings to stable from negative. In the opinion of the rating agencies, Aegon’s balance sheet is more resilient to stress as a result of an improved risk profile. In addition, Aegon delivered on its strategy with the full repayment to the Dutch State in June 2011 and the divestment of its life reinsurance activities in August 2011.

Aegon’s core capital, excluding revaluation reserves, amounted to EUR 16.9 billion, equivalent to 73.6%6 of the company’s total capital base at the end of the third quarter. Aegon aims the proportion of core capital to be at least 75% of total capital by the end of 2012.

Shareholders’ equity increased to EUR 19.4 billion as a result of the appreciation of the US dollar against the euro and a significant increase in the revaluation reserves during the third quarter. Shareholders’ equity per common share, excluding preference capital, amounted to EUR 9.21 at September 30, 2011.

The revaluation reserves at September 30, 2011 increased to EUR 2.6 billion, mainly the result of a significant decrease in risk-free interest rates which had a positive effect on the value of fixed income securities, partly offset by spread widening. In addition, the foreign currency translation reserves improved, primarily the result of a strengthening 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 third quarter, excess capital in the holding increased to EUR 1.2 billion as a result of dividends received from business units.

At September 30, 2011, Aegon’s Insurance Group Directive (IGD) ratio amounted to ~190%, a decrease from the level of ~200% at the end of the second quarter. 

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 posted negative operational free cash flows of EUR 678 million during the third quarter of 2011. Operational free cash flows were severely affected in the United States as a result mainly of the sharp decline in interest rates. Excluding the impact of financial markets in the third quarter, operational free cash flows totaled EUR 397 million. Operational free cash flows represent distributable earnings generation of the business units. The impact of capital preservation initiatives or proceeds from disposals are not included in the reported operational free cash flows.