Solid underlying earnings; net income impacted by equity hedging
Underlying earnings of EUR 445 million; effects of business growth and favorable equity markets offset by exits from partnerships in Spain and higher sales and employee performance related expenses
Decline in net income to EUR 204 million mainly due to losses on equity hedging programs established to protect the capital position
Return on equity decreases to 6.3%, or 7.0% excluding run-off businesses, as high net income in previous periods resulted in higher average shareholders' equity
Continued sales momentum in accumulation and at-retirement products
New life sales increase 12% to EUR 499 million; particularly strong pension sales in the UK and NL
Accident & health and general insurance sales increase 14% to EUR 239 million
Deposits 9% lower at EUR 10 billion; substantial increase in variable annuity and retail mutual fund deposits offset by lower asset management and pension deposits
Market consistent value of new business increases significantly to EUR 232 million, due to higher sales and improved margins as a result of product repricing and redesign
Strong capital position and cash flows
IGDa) solvency ratio stable at 224%; US RBC ratio of ~485%
Excess capital of EUR 1.8 billion at holding level
Operational free cash flow of EUR 553 million, including exceptional items of EUR 233 million
Statement of Alex Wynaendts, CEO
"Our solid results, in terms of underlying earnings, sales and our capital position confirm that our strategic priorities are the right ones. In the first quarter, the sharp rise in equity markets resulted in a loss on our equity hedging programs which impacted net income. These hedging programs have been put in place to protect our capital position, in line with our strategy to reduce Aegon's exposure to financial market risk. The gradual improvement of financial markets resulted in impairments reaching their lowest level since the start of the financial crisis in 2008.
"The recent conclusion of our partnership with Caja de Ahorros del Mediterráneo at favorable terms, along with our new long-term exclusive distribution agreement with Banco Santander, marks the successful restructuring of our business in Spain. In the UK, our focus on reducing expenses, while also making the necessary investments in new platform capabilities, has positioned Aegon to capture the significant growth opportunities in the new environment. Overall, this was a solid quarter for Aegon and it is clear our strategy is delivering the intended benefits for our customers, shareholders, employees and business partners."
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 business partners, as well as the most-preferred employer in the sector.
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. A further demonstration of Aegon's more disciplined focus has been a better balance between spread-based and fee-generating business, a substantially improved risk-return profile and an improved capital position.
Continued economic uncertainty has increased the opportunities for Aegon in pursuing its purpose of helping people take responsibility for their financial future. To capture these opportunities, Aegon is accelerating 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 to adapt to the changing distribution environment.
Optimize portfolio Aegon has reached an agreement with Banco Sabadell to sell its 50% stake in its life insurance partnership originally established with Caja de Ahorros del Mediterráneo (CAM) for a consideration of EUR 449.5 million. This amount, combined with the proceeds from its two previously announced joint venture exits (Banca Cívica and Unnim Banc), brings the total realized by Aegon to EUR 1 billion. This transaction with Banco Sabadell completes Aegon's restructuring of its business in Spain after announcing plans last year to exit certain partnerships as a result of the ongoing consolidation within the bank sector.
Aegon maintains a long-term commitment to Spain and has recently reinforced its market position with an exclusive 25-year strategic partnership with Banco Santander to distribute life and general insurance products through its extensive network of over 4,600 bank branches. This long-term alliance with Spain's largest financial group provides access to a potential client base of twelve million individuals across the country. Aegon will also continue to distribute its life insurance and protection products through its network of agents, as well as through the branch networks of Liberbank and Caja Badajoz, the company's other two joint venture partners.
Deliver operational excellence Aegon recently received two awards for its Aegon Retirement Choices (ARC) platform in the United Kingdom within the categories 'Leading Innovation' and 'Best Workplace Savings Platform'. The awards were given at the annual Platform Awards in London, hosted by The Platforum. The platform is recognized for the innovative seamless link it makes between Workplace Savings and At-Retirement. ARC offers a simple, online interface where both customers and advisors can flexibly manage their savings and retirement income, creating a smooth transition from retirement planning to retirement living.
Enhance customer loyalty Putting the customer first is central to Aegon's strategy and long-term ambitions. Management within all business units are fully aligned and incentivized to create a customer centered culture and to measure customer satisfaction on a consistent basis. A key element of Aegon's strategy is to get closer to its customers by an increased use of technology and a greater focus on the needs of the customers at every level within the organization.
Increasingly, individuals are exploring financial services and insurance-related products online and desire greater knowledge about how certain products and services will address their needs. New online tools were recently launched in the Dutch and the US market. In the Netherlands, Aegon launched Kroodle, one of the world's first Facebook insurance products. Kroodle offers innovative, online products allowing customers in the Netherlands to purchase insurance and manage their accounts through their Facebook profile. In the United States, the improved Transamerica Direct website makes it easy for customers to learn more about their insurance needs and make purchase decisions. It offers videos, a downloadable guide and a new Plan Builder tool to help educate customers on the different types of insurance products available to them. These are just two examples of the many investments Aegon is making that are expected to yield results in the longer-term and that support the company's strategy and ambitions.
Empower employees Aegon realizes that continued success is only possible with the commitment and dedication of its employees and recently completed its second annual employee engagement survey. The survey's participation rate increased from 78% to 89% this year. The results, expressed in 'Engagement' and 'Enablement', were up from 63 points to 67 points and from 64 points to 67 points respectively. This provides clear evidence that the initiatives pursued in each business unit are working to help employees better understand Aegon's goals and how they individually contribute to the company's success.
Underlying earnings before tax Aegon's underlying earnings before tax increased 1% compared to the first quarter of 2012 to EUR 445 million in the first quarter of 2013. Business growth and the positive effects of favorable equity markets were offset by the loss of earnings due to the sale of the company's interests in partnerships in Spain (EUR 14 million) and higher sales and employee performance related expense (EUR 13 million).
Underlying earnings from the Americas increased to EUR 312 million. The 3% increase compared to the first quarter of 2012 is mainly the result of growth in Pensions and Life & Protection partly offset by lower fixed annuity earnings due to lower account balances and decreased spreads, as well as higher sales and employee performance related expenses.
In the Netherlands, underlying earnings increased 5% to EUR 85 million as higher earnings in Life & Savings and Non-life were partly offset by lower Pension earnings due to lower investment income as a result of the persisting low interest rate environment.
Underlying earnings from Aegon's operations in the United Kingdom of EUR 24 million were 20% lower compared to the first quarter of 2012. Earnings were negatively impacted by adverse persistency (EUR 8 million) following the implementation of the Retail Distribution Review. It is expected that the effects of adverse persistency will continue at least into the second quarter of 2013. These effects were partly offset by favorable equity market movements.
Underlying earnings from New Markets decreased 30% to EUR 62 million. Higher earnings from Asia were more than offset by lower underlying earnings from Aegon Asset Management, Central & Eastern Europe and Spain. Results in Spain were impacted by EUR 14 million as a result of the divestments of the joint venture with Banca Cívica and the partnership with CAM, while earnings from CEE included a charge of EUR 3 million related to the recently introduced insurance tax.
Total holding costs decreased 40% to EUR 38 million, mainly the result of lower net interest expenses following debt redemption.
Net income Net income decreased to EUR 204 million as higher underlying earnings, realized gains on investments and lower impairments were more than offset by losses from fair value items.
Fair value items The results from fair value items amounted to a loss of EUR 286 million. The loss was mainly due to macro equity hedging programs in the Americas which were unfavorably impacted by strong increases in equity markets during the first quarter. Aegon increased the macro hedge program during the fourth quarter of 2012 to also include the economic impact from future fee revenue related to variable annuity account balances. As the macro hedges are being carried at fair value versus the fee revenue emerging over time, the strong equity performance in the first quarter created an unusually large loss that will be offset over time as the fees emerge into underlying earnings. The hedging programs have been designed to mitigate the effect of substantial movements in equity markets on Aegon's capital position.
Realized gains on investments In the first quarter, realized gains on investments amounted to EUR 113 million and were the result of normal trading activity in the investment portfolio and asset liability management.
Impairment charges Impairments improved significantly compared to last year and amounted to EUR 17 million. They were largely related to residential mortgage loans in the Netherlands and Hungary as a result of an increase in arrears. In the Americas, there were net recoveries as impairments primarily linked to mortgage loans and mortgage related securities were fully offset by recoveries.
Other charges Other charges amounted to EUR 4 million and related mostly to a charge of EUR 81 million related to increased accruals in connection with the company's use of the U.S. Social Security Administration's death master-file, offset by a gain of EUR 85 million related to the recapture of certain reinsurance contracts in the United States.
Run-off businesses The results of run-off businesses amounted to a loss of EUR 14 million, which was primarily due to the reinsurance business. Aegon divested its life reinsurance business during 2011 through a reinsurance transaction and carries an intangible asset as a result. The buyer of the divested life reinsurance business transferred client contracts onto its own book faster than originally anticipated resulting in an acceleration of the amortization of the intangible asset during the quarter (EUR 19 million).
Income tax Income tax amounted to EUR 33 million in the first quarter. The effective tax rate on underlying earnings for the first quarter of 2013 was 27%. The effective tax rate on total income was 14% driven by the combined effects of negative fair value items taxed at nominal rates, tax credits and tax exempt items.
Return on equity Return on equity decreased to 6.3% for the first quarter of 2013 as high net income in previous periods resulted in higher average shareholders' equity excluding revaluation reserves and defined benefit plan remeasurements. Return on equity for Aegon's ongoing businesses, excluding the run-off businesses, amounted to 7.0% over the same period.
Operating expenses In the first quarter, operating expenses increased 5% to EUR 804 million mainly as a result of higher sales and employee performance related expenses as well as favorable timing of expenses in the comparable quarter last year.
Sales Compared to the first quarter of 2012, Aegon's total sales decreased 1% to EUR 1.7 billion. New life sales grew strongly, driven mainly by higher pension production as a result of strong market propositions in the Netherlands and the United Kingdom. In the Americas, new life sales declined primarily driven by lower universal life sales due to product withdrawals and product redesign, resulting from the focus on value creation. Gross deposits remained strong, with particular success in both the variable annuity and retail mutual fund businesses in the United States. Net deposits, excluding run-off businesses, amounted to EUR 1.7 billion and were primarily driven by variable annuity and retirement deposits in the United States.
Market consistent value of new business The market consistent value of new business increased strongly to EUR 232 million mainly as a result of product repricing and redesign in the United States and a higher contribution from mortgage and pension production in the Netherlands.
Revenue-generating investments Revenue-generating investments increased 4% compared to year-end 2012 to EUR 476 billion at March 31, 2013, as a result of continued net inflows and favorable equity market movements.
Capital management Shareholders' equity decreased EUR 1.1 billion from year-end 2012 to EUR 23.6 billion at March 31, 2013, mainly as a result of accounting changes (IAS 19). The revaluation reserves decreased slightly during the first quarter to EUR 5.7 billion, mainly a reflection of slightly higher interest rates. Aegon's core capital, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 18.9 billion, equivalent to 76.3%6 of the company's total capital base at March 31, 2013. This is a slight decline from year-end 2012, mainly as a result of a decline in holding excess capital. In the first quarter, excess capital in the holding decreased to EUR 1.8 billion primarily the result of interest payments and operating expenses.
Shareholders' equity per common share, excluding preference capital, revaluation reserves and defined benefit plan remeasurements, amounted to EUR 8.10 at March 31, 2013.
At March 31, 2013, Aegon's Insurance Group Directive (IGD) ratio remained relatively stable at 224%, including a 13% negative impact from IAS 19. Measured on a local solvency basis, the Risk Based Capital (RBC) ratio in the United States decreased to ~485% as net income for the quarter was offset by higher capital requirements. The IGD ratio in the Netherlands increased to ~265%, as capital benefits were partly offset by the impact of IAS 19 and changes in the revaluation reserves. The Pillar I ratio in the United Kingdom was ~120% at the end of the first quarter of 2013.
Cash flows Operational free cash flows of EUR 553 million were particularly strong during the quarter. Excluding exceptional items of EUR 233 million and market impacts, operational free cash flows amounted to EUR 327 million. The exceptional items were primarily related to the effects of model refinements and methodology changes in the Netherlands and lower cash flow testing reserves in the United States. The impact of market movements was negligible during the first quarter. Operational free cash flows represent the distributable earnings generated by the business units.
Mandatory changes in accounting policies On January 1, 2013, the following new, mandatory accounting policies became effective:
IFRS 10 changes the definition of control and IFRS 11 changes the definition with respect to investments and jointly-controlled entities. As a result, Aegon has consolidated one mortgage securitization vehicle, revisited consolidation of several investment funds and uses the equity method instead of using proportionate consolidation for its joint ventures.
IAS 19 changes the accounting for assets and liabilities relating to employee benefits. Upon transition to the revised IAS 19, Aegon recognizes all actuarial gains and losses as they occur and therefore no longer applies the corridor approach. Furthermore, past service costs are recognized if the benefits have vested following the introduction of, or changes to, a pension plan.
IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. It does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS. The application of IFRS 13 has not impacted Aegon's fair value measurements.
Aegon has applied these new standards retrospectively (except for IFRS 13) and therefore restated its 2012 financial position. Shareholders' equity was negatively impacted by EUR 1.1 billion and underlying earnings before tax were positively impacted by EUR 64 million. More details on these changes and a summary of their effects on the financial position of the company are described in Aegon's condensed consolidated interim financial statements for the first quarter of 2013.