Aegon delivers strong earnings growth and increased value of new business
November 08, 2012, 8:30 CET
"During the third quarter, we were again able to capture the benefits of Aegon’s strategic priorities, resulting in solid earnings growth, improved profitability of sales, lower expenses and a continued strong capital position."
Higher earnings driven by growth, lower expenses and favorable currency movements
Underlying earnings increase to EUR 472 million, including a positive effect of EUR 17 million as one-time provision releases were partly offset by the negative effect of assumption updates
Net income of EUR 374 million driven by higher underlying earnings, lower impairments and the non-recurrence of charges in the comparable quarter last year partly offset by higher taxes
Return on equity increases to 7.7%, and 8.6% excluding run-off businesses
Sales stable – higher accident & health sales offset by lower deposits
New life sales level at EUR 405 million; strong sales in the US offset by NL, UK and Spain
Accident & health sales increase 24% to EUR 190 million driven by growth in the Americas
Deposits decline 10% to EUR 9.4 billion, reflecting lower stable value deposits
Market consistent value of new business increases strongly to EUR 173 million as a result of product repricing and improved margins
Continued strong capital position and cash flows
Capital base ratio of 75.0%, in line with target of at least 75% by year-end 2012
IGDa) solvency ratio increases to 222%
Operational free cash flow of EUR 448 million, excluding market impact of EUR (407) million
Statement of Alex Wynaendts, CEO
"During the third quarter, we were again able to capture the benefits of Aegon's strategic priorities, resulting in solid earnings growth, improved profitability of sales, lower expenses and a continued strong capital position. Our franchise remains healthy, as evidenced by the particularly high level of At-Retirement and pension sales. At the same time, we are making essential investments to reshape our businesses in both our established and developing markets to respond effectively to the changing conditions and new realities. Although there are signs of gradually improving market conditions, there remains considerable uncertainty in the general economic environment. Consequently, we believe it is prudent and necessary to maintain a sufficient financial buffer while at the same time adhering to our strict risk and pricing discipline. The steps we are taking across our organization to get closer to our end customers, combined with the strength of our current position, give us full confidence in the prospects for our business going forward."
Aegon launches a new online banking platform in the Netherlands
Workplace Savings platform launched in the United Kingdom
Aegon regains its place in the Dow Jones Sustainability European Index
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 intermediaries, as well as the most-preferred employer in the sector.
Continued economic uncertainty has increased the opportunities for Aegon in pursuing its clear purpose of helping people take responsibility for their financial future. To capture these opportunities, Aegon will accelerate the development of new business models by investing in innovative, technology driven distribution channels, to connect better and more frequently with customers, improve service levels and increase retention rates. Aegon's accelerated investments in technology will also better support intermediaries adapt to the changing distribution environment.
In recent years, Aegon has implemented a broad restructuring program to sharpen its focus on its core lines of business, significantly reduce its overall cost base, and create greater efficiencies across the organization. This has resulted in a better balance between spread-based and fee-generating business, a substantially improved risk-return profile, the divestment of non-core businesses, a lower cost base, and an improved capital base ratio.
Optimize portfolio At the end of September, Aegon launched a new online bank in the Netherlands, called "Knab". This innovative new platform gives customers increased insight into their financial situation and uses state of-the-art technology to provide easier lifetime financial planning. Knab also allows the company to interact with customers in real-time and to use client feedback to ensure that all offered solutions meet customer needs.
In the United Kingdom, to capture opportunities in the At-Retirement market, Aegon launched its new platform proposition called "Aegon Retirement Choices" in November 2011. The company recently added its Workplace Savings proposition to the platform with the unique feature of allowing customers to remain on the platform as an individual customer throughout retirement. Pension reform and the Retail Distribution Review will transform pension products and services and how they are distributed. Aegon's platform offers a compelling solution to advisers, employers, and their employees. Positive market response has helped the company secure a number of strategic distribution agreements, reaffirming Aegon's leading role in the pensions and At-Retirement market.
On October 1, 2012, Aegon Asset Management closed the transaction to sell its minority stake in Prisma Capital Partners, a provider of hedge fund solutions, to KKR for a total consideration of EUR 100 million. Prisma's contribution to underlying earnings totaled EUR 8 million for the first nine months of 2012.
Aegon expects that the consolidation of Spanish savings banks will lead to exiting one or more of its joint ventures in Spain. Following the announced merger between Banca Cívica and CaixaBank, Aegon reached an agreement to end the life, health and pension partnership with Banca Cívica and to sell its 50% interest in the joint venture to CaixaBank for a total consideration of EUR 190 million. The transaction was closed on October 11, 2012 and will result in a book gain of EUR 35 million before tax which will be accounted for in the fourth quarter of 2012. Aegon's share in underlying earnings before tax of the joint venture totaled EUR 13 million for the first nine months of 2012.
Deliver operational excellence 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 increased longevity provisioning and a declining life insurance back-book. Up to and including the third quarter, Aegon has implemented costs savings of EUR 80 million.
Aegon retained its place in the Dow Jones Sustainability World Index for 2012-2013, and regained its position in the European index after a one-year absence. This was due to a significant improvement in the company's overall sustainability rating. Aegon has made substantial progress in several key areas. In particular, the company has improved its approach to human resources, brand and customer relationship management. The introduction of a company-wide framework governing pay and remuneration, as well as the further progress of Aegon's talent management program also strengthened overall performance. In addition to the DJSI, Aegon is included in the FTSE4Good Index, and was recently admitted to Vigeo's Advanced Sustainability Performance Index for euro zone companies.
Underlying earnings before tax Aegon's underlying earnings before tax increased 31% to EUR 472 million in the third quarter of 2012. This is the result of business growth, a strong delivery on cost reduction programs, favorable markets and currency movements. Earnings included a positive effect of EUR 17 million, as one-time provision releases of EUR 39 million were partly offset by the negative effect of customer behavior assumption updates of EUR 22 million.
Underlying earnings from the Americas rose to EUR 344 million. The 12% increase compared to the third quarter of 2011 is due to underlying growth in the business, and a strengthening of the US dollar against the euro offset by the non-recurrence of favorable items last year. Earnings in the third quarter also included a one-time benefit from changes in post-retirement benefit plans of EUR 27 million, while the net negative impact of assumption changes amounted to EUR 29 million.
In the Netherlands, underlying earnings increased 21% to EUR 82 million. This increase was mainly the result of higher earnings in Life & Savings which included a one-time provision release of EUR 8 million, partly offset by lower margins in Pensions and Non-life.
In the United Kingdom, underlying earnings increased to EUR 26 million. This strong improvement in earnings compared to the same period last year, was driven by the non-recurrence of extraordinary charges and the successful implementation of the cost reduction program. Earnings were negatively impacted by adverse persistency and investments in new propositions in the pension business. It is expected that this will continue in coming quarters.
Underlying earnings from New Markets increased 52% to EUR 70 million. Higher results of Aegon Asset Management, as well as from Asia and Central & Eastern Europe were partly offset by lower underlying earnings from Spain and Variable Annuities Europe.
Total holding costs decreased 28% to EUR 50 million as a result of Aegon's Corporate Center expenses being charged, in part, to operating units as of the first quarter 2012. These charges reflect the services and support provided to operating units by the Corporate Center. Charges to operating units in the third quarter of 2012 amounted to EUR 16 million.
Net income Net income increased to EUR 374 million as higher underlying earnings and realized gains on investments, more favorable results on fair value items and lower impairments were only partly offset by higher tax charges.
Fair value items The results from fair value items amounted to a loss of EUR 126 million. The most important contributors to the loss were the negative results from the equity hedge programs in the United States and the United Kingdom, negative revaluation of direct real estate investments in the Netherlands and the impact of lower credit spreads on the valuation of Aegon bonds.
Realized gains on investments In the third quarter, realized gains on investments amounted to EUR 128 million and were mainly the result of normal trading activity in the investment portfolio.
Impairment charges Net impairments improved significantly and amounted to EUR 35 million. Gross impairments remained relatively stable compared to previous quarters and were primarily linked to residential mortgage backed securities in the United States, partly offset by strong recoveries.
Other income Other income amounted to EUR 3 million, mainly the result of UK policyholder tax with an equal and opposite charge in the tax income line offset by restructuring charges of EUR 3 million in the Netherlands and a one-time provision of EUR 5 million in Poland.
Run-off businesses The results of run-off businesses amounted to EUR 12 million and were driven by improved results on the institutional spread-based business and BOLI/COLI, only partly offset by lower results from payout annuities.
Income tax Income tax amounted to EUR 80 million in the third quarter, translating into an effective tax rate of 18%. The main drivers of the lower than nominal tax rate were tax exempt income in the Americas and the Netherlands, tax credits and the benefit of a tax rate decrease in the United Kingdom.
Return on equity The increase in return on equity to 7.7% for the third quarter of 2012, was driven by the positive effect of growth in net underlying earnings only partly mitigated by higher shareholders' equity excluding revaluation reserves. Return on equity for Aegon's ongoing businesses, excluding the run-off businesses, amounted to 8.6% over the same period.
Operating expenses In the third quarter, operating expenses decreased 10% to EUR 798 million as a result of cost savings, lower restructuring charges and the one-time benefit of changes in post-retirement benefit plans in the United States. On a comparable basis, operating expenses decreased 4% compared with the third quarter of 2011.
Sales Aegon's total sales amounted to EUR 1.6 billion. New life sales were stable, as increased sales in the Americas and the effects of favorable currency movements were offset by lower sales in the Netherlands, the United Kingdom and Spain. In Spain, sales declined mainly as a result of lower production at joint venture partners due to a number of adverse developments in the Spanish market, as well as the exclusion of sales from its partnership with CAM. Gross deposits remained strong for the variable annuity, retirement plan and asset management businesses, partly offset by lower stable value deposits. New premium production for accident & health insurance increased, mainly driven by strong travel insurance sales in the United States.
Market consistent value of new business The market consistent value of new business increased to EUR 173 million mainly as a result of product repricing in the United States, a higher contribution from mortgage production in the Netherlands and improved margins in the UK annuity business.
Revenue-generating investments Revenue-generating investments rose 2% compared to the second quarter-end 2012 to EUR 463 billion at September 30, 2012. This was mainly the result of favorable markets and net inflows.
Capital management Aegon's core capital excluding revaluation reserves amounted to EUR 18.7 billion, equivalent to 75.06 of the company's total capital base at September 30, 2012. This is in line with the company's capital base ratio target of at least 75% by the end of 2012.
Shareholders' equity increased to EUR 24.5 billion. This increase was mainly a result of the third quarters' net income and an increase in the revaluation reserves. The revaluation reserves increased by EUR 1.4 billion during the third quarter to EUR 5.9 billion, mainly a reflection of lower credit spreads and interest rates. Shareholders' equity per common share, excluding preference capital and revaluation reserves, amounted to EUR 8.50 at September 30, 2012.
In 2012, Aegon aims to maintain excess capital at the holding of at least EUR 750 million. During the third quarter, excess capital in the holding remained stable at EUR 1.6 billion. The dividends received from operating units were offset by interest payments, dividends on common shares and operational expenses.
At September 30, 2012, Aegon's Insurance Group Directive (IGD) ratio amounted to 222%, an increase from the level of 216% at the end of the second quarter. Measured on a local solvency basis, the Risk Based Capital (RBC) ratio in the United States increased to ~480%. This was the result of a combination of strong net income and a capital management transaction that made USD 575 million of additional regulatory capital available, partly offset by dividends paid to the holding company. The IGD ratio in the Netherlands decreased slightly to ~255% mainly the result of lower interest rates and credit spreads, while the Pillar I ratio in the United Kingdom remained level at ~130% at the end of the third quarter of 2012.
Cash flows Operational free cash flow amounted to EUR 41 million. Excluding negative market impacts of EUR 407 million, the operational free cash flows amounted to EUR 448 million. Market impacts related mainly to lower interest rates and narrowing credit spreads. Operational free cash flows excluding market impacts were particularly strong during the quarter, mainly the effect of model refinements.
Operational free cash flows represent the distributable earnings generated by the business units. The impact of capital preservation initiatives is not included in the reported operational free cash flows. Aegon is on track to improve operational free cash flow from its 2010 normalized level of EUR 1.0-1.2 billion per annum by 30% by 2015.