Strong underlying earnings; net income impacted by fair value items
Underlying earnings increase to EUR 478 million; positive effects of business growth and favorable equity markets partly offset by restructuring in Spain and unfavorable currency exchange rates
Net income of EUR 243 million impacted by fair value losses mainly due to higher equity markets, increased equity market volatility and rising interest rates
Return on equity amounts to 6.7%, or 7.4% excluding run-off businesses
Positive sales trend in accumulation and at-retirement products continues
New life sales increase 21% to EUR 520 million; particularly strong pension sales in the UK and NL
Accident and health and general insurance sales decrease 7% to EUR 187 million due to the termination of certain distribution partnerships
Deposits up 30% to EUR 12.7 billion; significant increases in asset management, variable annuity, retail mutual fund and pension deposits partly offset by lower stable value deposits
Market consistent value of new business increases significantly to EUR 202 million, the result of increased sales volumes, higher interest rates and management actions to improve margins
Continued strong capital position and cash flows
IGDa) solvency ratio at 220%, reflecting strong operating unit capital positions
Excess capital at holding increases to EUR 1.9 billion
Operational free cash flow of EUR 674 million; market impact and one-time items of EUR 308 million
Interim dividend increases to EUR 0.11 per share; dilutive effect of stock dividend to be neutralized
Statement of Alex Wynaendts, CEO
"The growth of our underlying earnings and sales during the quarter demonstrates that Aegon continues to benefit from its strategic transformation. Particularly strong performance in pensions and variable annuities in our key markets shows ongoing customer demand for our core retirement products.
"We continued to execute our strategy with a series of high-quality partnerships that strengthen Aegon's distribution networks, expanding our reach and positioning us for further sales growth in the Americas, UK and Spain. These agreements are a unique opportunity to create long-term relationships with a large number of potential customers, as all of us at Aegon continue working to help people secure their financial future.
"Our strong capital position and operational free cash flows enable us to increase our interim dividend, a sign of our confidence in the company. With the business positioned to benefit from rising interest rates, recent developments in the US and elsewhere allow us to create further long-term value for both our customers and our shareholders.
"I am pleased to say that our solid performance this quarter shows that the decisions we have taken are the right ones, and supports future strategic actions that we feel are necessary to achieve a leadership position in each of our chosen markets."
Progress on execution of strategy highlighted at recent investor day
New distribution agreements to drive new business growth
Further signs that the company's customer-centric strategy is delivering results
Strategic update Aegon continues to make solid progress on its strategic transformation as highlighted by management at Aegon's Analyst & Investor Conference in London. At the conference, Aegon's CEO, Alex Wynaendts, emphasized the need to leverage Aegon's strength in the At-Retirement market, while remaining focused on creating a truly customer-centric culture, particularly through on-going investment in technology and innovation. Aegon's newly appointed CFO, Darryl Button, provided the trajectory toward the company's 2015 financial targets, discussed Aegon's capital management policy and announced a three-year capital deployment strategy.
Aegon is on track to achieve its target to double the proportion of earnings generated from fee-based businesses to 30-35%, as well as its aim to achieve operational free cash flows of between EUR 1.3 and 1.6 billion by 2015. Supported by new business growth at attractive returns, Aegon is on a clear path toward higher earnings and return on equity (RoE) growth. In an environment of low interest rates, however, the company recognizes that its underlying earnings and RoE have been impacted negatively, in line with previously provided sensitivities. Aegon is currently on a trajectory to deliver an increase in underlying earnings before tax of 7-10% from 2012 to 2015. With regard to its return on equity target, Aegon is currently on a path to achieve an RoE of between 8-10%, assuming current reinvestment yields until 2015, and taking into account the recent preferred share transaction and further capital deleveraging. Management, however, affirms its ambition to achieve an RoE of 10-12% and recognizes that additional actions are required to do so.
Aegon outlined its disciplined capital management policy to promote sustainable cash flows and support its strategic transformation. The company's business unit capitalization between its self-imposed target and buffer levels enables it to satisfy local regulatory and rating agency requirements while facilitating stable dividends to the holding. Holding excess capital allows Aegon to service debt, pay a sustainable dividend to shareholders and execute its strategy. Management also introduced a three-year capital deployment strategy, supported by the strong capitalization levels in most of Aegon's business units and at the holding. This balanced strategy includes commitments to reduce leverage, maintain a sustainable cash dividend and execute strategic priorities.
Aegon continues to pursue its strategic aim to be a leader in all of its chosen markets, supported by four strategic objectives embedded in all Aegon businesses: Optimize portfolio; Enhance customer loyalty; Deliver operational excellence; and Empower employees. These 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.
Optimize portfolio Continued success in developing new distribution agreements has been a key driver of new business growth, allowing Aegon to expand its market presence and further strengthen its market position. In the Americas, approximately 20% of Transamerica's new Life & Protection business is from distribution that did not exist five years ago. Variable annuity sales growth in the Americas has also been supported by new distribution agreements. These include the launch of a private label variable annuity with Voya, announced earlier this year, and the recently-announced agreement with leading brokerage firm Edward Jones. In the United Kingdom, Aegon was selected by Mercer as one of their three large defined-contribution provider partners, and as the sole partner for their SME business. This important agreement highlights the relevance and growing success of Aegon's new pension platform, and builds on the distribution agreement with Barclays Bank announced earlier this year.
In Spain, Aegon began distributing insurance products through its expanded network, created as a result of a significant new partnership with Banco Santander, Spain's leading bank.
Aegon identified further opportunities to optimize its portfolio to achieve its ambition. In the United Kingdom, Aegon announced the sale of its distribution business, Positive Solutions, allowing the company to focus fully on its life and pension businesses and the success of its new platform business. Aegon will continue to review all of its businesses for strategic fit and return prospects. In Spain, Aegon's previously announced exits of its joint ventures with Unnim and Caja de Ahorros del Mediterráneo (CAM) closed on May 7, 2013 and July 19, 2013 respectively.
Deliver operational excellence Strict pricing discipline has led to increased profitability, despite lower interest rates, and will be a driver of earnings growth and RoE expansion. Aegon's strict market consistent pricing standards encourage products that are less sensitive to financial markets. It has also led to product adjustments, including real-time pricing of universal life products and re-priced long-term care and variable annuities in the US, and re-priced disability products in the Netherlands.
Aegon's continued focus on cost efficiency is evident with recently-announced changes to its distribution structure in the United Kingdom, including the closure of six regional sales offices. These cost savings are in addition to significant reductions already realized in the United Kingdom. Cost discipline extends to all parts of the organization. The Dutch business is on track to achieve its cost reduction targets. In the Americas, the aim is to keep operating expenses flat while growing the business faster than the industry. However, sales and employee related expenses incurred due to the exceptionally strong growth levels put upward pressure on cost levels. At the holding, a reduction of operating expenses and lower funding costs through deleveraging have been realized.
Enhance customer loyalty Aegon believes that creating a customer-centric culture will enable it to further grow by responding to changing markets and customer behaviors. A key element of Aegon's strategy is to get closer to its customers by increased deployment of technology at all levels of the organization. In the US, Transamerica released the Retirement Outlook Estimator, a new mobile app designed to help users understand and plan for a healthy financial future by projecting a personalized retirement outlook against their retirement goals. In India, Aegon Religare won the E-Business leader award for innovative online life insurance products iTerm and iHealth. These simple online products, the first of their kind available in India, were commended for improving digital distribution to the customer.
For the fourth year in a row, Aegon won the prestigious Pension Provider of the Year award at the European Pensions Awards. The award recognizes the work of multinational companies and their advisors to develop and implement effective pension solutions. It reflects Aegon's expertise in and dedication to cross-border European pension solutions, and validates Aegon's client-focused approach to pensions.
Empower employees Aegon continues to implement initiatives to help employees better understand Aegon's goals and how they contribute individually to the company's success. In an effort to develop a truly customer-centric culture, Aegon recently rolled out its Customer License Program, encouraging employees to focus on solutions to customer issues in which they have particular interest. Employees in this program spend time at one of the company's customer service call centers, with one of its intermediaries or in another capacity that provides them with direct customer interaction. Aegon believes this initiative, and others similar to it, will help its employees better relate to customers, ultimately translating into a stronger market position with increased customer brand loyalty.
Underlying earnings before tax Aegon's underlying earnings before tax increased 5% to EUR 478 million compared to the second quarter of 2012. Business growth and the positive effects of favorable equity markets more than offset the loss of earnings due to the sale of Prisma in the fourth quarter of 2012 and the company's interests in partnerships in Spain (EUR 11 million), as well as the impact of unfavorable currency exchange rates (EUR 12 million).
Underlying earnings from the Americas increased to EUR 360 million. The 3% increase on the second quarter of 2012 is mainly the result of growth in Variable Annuities and Pensions, partly offset by higher sales and employee related expenses.
In the Netherlands, underlying earnings were stable at EUR 74 million as higher earnings in Life & Savings were partly offset by lower Pension earnings due to adverse underwriting results. Earnings from non-life did not increase compared to the second quarter of 2012, as improved earnings from disability were offset by adverse claim experience in general insurance.
Underlying earnings from Aegon's operations in the United Kingdom of EUR 27 million were up 4% compared to the second quarter of 2012. Earnings were negatively impacted by adverse persistency (EUR 9 million) following the implementation of the Retail Distribution Review. It is expected that the effects of adverse persistency will start to wear off in the second half of 2013. These effects were more than made up for by favorable equity market movements, improved mortality and favorable claims experience.
Underlying earnings from New Markets decreased 19% to EUR 52 million. Higher earnings from Aegon Asset Management were more than offset by lower underlying earnings from Central & Eastern Europe and Spain. Results in Spain were impacted by EUR 8 million as a result of the divestments of the joint ventures with Banca Cívica and Unnim, while earnings from Central & Eastern Europe were impacted by unfavorable claims experience and included a charge of EUR 2 million related to the recently introduced insurance tax in Hungary.
Total holding costs decreased 38% to EUR 35 million, mainly as a result of lower net interest expenses following debt redemptions and lower operating expenses at the holding.
Net income Net income decreased 2% to EUR 243 million as higher underlying earnings and higher other income 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 270 million. This was primarily caused by the loss on fair value hedges without an accounting match under IFRS, which amounted to EUR 152 million in the second quarter of 2013. The main drivers were rising equity markets, increased equity market volatility, but also higher interest rates.
Fair value hedging with an accounting match, which include the hedges on Aegon's GMWB variable annuities block and the guarantees on general account products in the Netherlands, contributed EUR 20 million to earnings. Fair value investments underperformed by EUR 75 million during the second quarter of 2013, mainly driven by alternative investments in the Americas and the residential rental real estate portfolio in the Netherlands.
The loss on other fair value items amounted to EUR 63 million, mainly driven by lower credit spreads impacting outstanding medium term notes, foreign currency movements and rising interest rates.
Realized gains on investments In the second quarter, realized gains on investments amounted to EUR 82 million and were the result of asset liability management and normal trading activity in the investment portfolio.
Impairment charges Impairments were up modestly compared to last year to EUR 57 million. These were largely related to impairments on structured assets in the Americas and a single corporate exposure in the UK, as well as residential mortgage loans in the Netherlands.
Other income Other income amounted to EUR 27 million and related mostly to the gain of EUR 102 million on the sale of the joint venture with Unnim, offset by charges in the United Kingdom related to business transformation costs (EUR 32 million) and the divestment of Positive Solutions (EUR 22 million), and a provision of EUR 25 million in the Netherlands following the KoersPlan court verdict in June.
On June 14, 2013, the Supreme Court denied Aegon's appeal and confirmed the ruling of the Court of Appeal from 2011 in the KoersPlan case. Aegon will compensate the approximately 35,000 policyholders of KoersPlan-products who were plaintiffs in the litigation. To cover for this liability, Aegon set up a provision of EUR 25 million in the second quarter of 2013. For policyholders of KoersPlan-products not plaintiffs in the litigation, the company is establishing whether any adjustment of the premium is appropriate.
Run-off businesses The results of run-off businesses increased to EUR 13 million, mainly due to improved results in the life reinsurance business in the Americas.
Income tax Income tax amounted to EUR 30 million in the second quarter. The effective tax rate on underlying earnings for the second quarter of 2013 was 24%. The effective tax rate on total income was 11%, driven by the combined effects of negative fair value items taxed at nominal rates, tax credits and tax exempt items including the gain on the sale of the Unnim joint venture.
Return on equity Return on equity decreased to 6.7% for the second quarter of 2013 as higher net underlying earnings were outweighed by higher preferred dividend payments and the increase in shareholders' equity resulting from the conversion of the preferred shares into common shares. Return on equity for Aegon's ongoing businesses, excluding the run-off businesses, amounted to 7.4% over the same period.
Operating expenses In the second quarter, operating expenses increased 6% to EUR 844 million mainly as a result of higher sales and employee related expenses in the United States and business transformation costs in the United Kingdom.
Sales Compared to the second quarter of 2012, Aegon's total sales increased 23% to EUR 2.0 billion. New life sales were up by 21%, 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 were flat on a US dollar basis, 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 particularly in both the variable annuity and retail mutual fund businesses in the United States and Aegon Asset Management. Net deposits, excluding run-off businesses, amounted to EUR 3.6 billion and were driven primarily by variable annuity and retirement deposits in the United States and third party inflow at Aegon Asset Management.
Market consistent value of new business The market consistent value of new business increased strongly to EUR 202 million mainly as a result of strong sales growth and higher margins in the United States, as well as a higher contribution from mortgages and increased pension production in the Netherlands.
Revenue-generating investments Revenue-generating investments declined 2% during the second quarter of 2013 to EUR 466 billion, as the negative impact of rising interest rates more than offset continued net inflows.
Capital management Shareholders' equity decreased EUR 2.5 billion compared to the end of the first quarter of 2013 to EUR 21.1 billion at June 30, 2013, as higher interest rates resulted in lower revaluation reserves. The revaluation reserves declined by EUR 2.0 billion to EUR 3.7 billion. Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 18.3 billion. The gross financial leverage ratio improved to 30.5% in the second quarter, as a USD 750 million senior bond which matured in June was not refinanced.
Excess capital in the holding increased to EUR 1.9 billion, as distributions to the holding and the proceeds on the sale of the joint venture with Unnim more than offset the cash used for the conversion of the preferred shares, the investment in the new joint venture with Banco Santander, dividend and interest payments and operating expenses. During the second quarter of 2013, Aegon received EUR 0.6 billion net cash distributions from its operating units. The Americas contributed EUR 0.4 billion and the Netherlands EUR 0.3 billion.
Shareholders' equity per common share, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 8.69 at June 30, 2013.
At June 30, 2013, Aegon's Insurance Group Directive (IGD) ratio slightly declined to 220%, including a 6% negative impact from the conversion of the preferred shares. Measured on a local solvency basis, the Risk Based Capital (RBC) ratio in the United States decreased to ~465% as net income for the quarter was offset by the USD 0.6 billion distributions to the holding. On a S&P basis, the surplus above the level required for a AA rating slightly declined to approximately USD 0.8 billion. The Pillar I ratio in the United Kingdom was ~170% at the end of the second quarter of 2013, reflecting favorable movements of interest rates. The IGD ratio excluding the benefit from the introduction of the ultimate forward rate and Aegon Bank in the Netherlands increased to ~235%, driven by the net income for the quarter and rising interest rates.
Cash flows Operational free cash flows were EUR 674 million in the second quarter of 2013. Excluding one-time items of EUR (16) million and market impacts of EUR 324 million, operational free cash flows amounted to EUR 366 million. The impact of market movements during the second quarter resulted mainly from the benefit of rising interest rates in the Americas and in the Netherlands.
Interim dividend The 2013 interim dividend amounts to EUR 0.11 per common share. The interim dividend will be paid in cash or stock at the election of the shareholder. The value of the stock dividend will be approximately equal to the cash dividend. Aegon will neutralize the dilutive effect of the stock dividend on earnings per share.
Aegon's shares will be quoted ex-dividend on August 15, 2013. The record date is August 19, 2013. The election period for shareholders will run from August 21 up to and including September 6, 2013. The stock fraction will be based on the average share price on Euronext Amsterdam from September 2 through September 6, 2013. The stock dividend ratio will be announced on September 6, 2013 after closing of Euronext Amsterdam. The dividend will be payable as of September 13, 2013.