"Aegon delivered a strong set of first quarter results in 2014, maintaining the positive momentum of previous quarters. Pensions, variable annuities and asset management all drove strong sales."
Q1 2014 Results | AEX:AGN | NYSE:AEG
Solid business growth drives higher underlying earnings before tax
- Underlying earnings up 7% to EUR 498 million, driven by growth, higher equity markets and lower holding leverage cost, partly offset by unfavorable exchange rates
- Fair value items loss of EUR 116 million, mainly due to hedging programs without accounting match
- Net income up strongly to EUR 392 million
- Return on equity increases to 8.4%
Strong sales growth driven by pensions, variable annuities and asset management
- Gross deposits up 35% to EUR 13.5 billion, driven by pensions and variable annuities in US and asset management; net deposits impacted by transfer of Polish pension assets and replacement of a large investment mandate
- Life sales down 8% to EUR 459 million; growth in US more than offset by lower UK sales post-RDR
- Increase of 17% to EUR 279 million in accident and health and general insurance sales
- Market consistent value of new business remains strong at EUR 223 million
Active capital management lowers funding costs
- Redemption and refinancing of debt supports achieving leverage goals by year-end 2014
- Holding excess capital of EUR 1.7 billion following deleveraging; solvency ratio remains at 212%
- Operational free cash flows of EUR 331 million
Statement of Alex Wynaendts, CEO
"Aegon delivered again a strong set of results, maintaining the positive momentum of previous quarters. Pensions, variable annuities and asset management all drove strong sales as many new and current customers placed their trust in Aegon. This is the result of ongoing improvements to products, service levels and operations that the group is implementing to enhance customer engagement.
"We are executing on our objective to reduce outstanding debt, which further strengthens our balance sheet and reduces funding costs. At the same time, we continue to make the necessary investments to accelerate the use of digital technology to get closer to our customers and to further enhance efficiencies across our organization.
"Aegon's strong performance gives us every confidence in our business and its continued ability to gain and retain customers and achieve a leadership position in each of our chosen markets."
For notes see page 23 of the full Q1 2014 earnings press release.
- Retiready launched to address retirement needs of growing non-advised market in UK
- Fitch rates Aegon UK AA- and S&P affirms rating and revises outlook to Stable
- Capital management actions reduce interest expenses, improving financial flexibility
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; Deliver operational excellence; Enhance customer loyalty; 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.
In Spain, Aegon reached an agreement to exit its life and pensions partnership with Caja de Badajoz and sell its 50% interest in the joint venture to Caja3. The sale is expected to result in a book gain of approximately EUR 7 million. It is anticipated that the transaction will close during the third quarter of 2014. Aegon's share in underlying earnings before tax of the joint venture totaled EUR 3 million in 2013. The transaction with Caja3 is part of
Aegon's restructuring of its business in Spain, a result of the ongoing consolidation within the banking sector. Aegon maintains a long-term commitment to Spain and has reinforced its market position last year with an exclusive strategic partnership with Banco Santander to distribute life and general insurance products through its extensive network of over 4,500 bank branches.
In the United Kingdom, Aegon launched Retiready, the final piece of the award-winning Aegon Retirement Choices platform. Retiready is a new digital service designed to empower customers without a financial advisor to prepare for their retirement and take control of their financial future.
The service encourages customers to consider their retirement ambitions, shows how incremental pension contribution adjustments can make a significant difference and then provides a range of options, including a simple pension and individual savings account, to address retirement needs. Retiready rounds out Aegon's platform offering in the United Kingdom and highlights Aegon's commitment to addressing the retirement needs of this important market.
Deliver operational excellence
Aegon's focus on operational excellence is about finding the most efficient and most effective way to use the resources within the organization. Often this results in cost savings that can be invested back into the business to improve the customer experience and drive growth. Other times, the result is a new structure that improves cooperation and innovation.
Aegon is a major provider of residential mortgages loans in the Netherlands and, as part of its SAECURE program, recently executed a transaction that provides funding for approximately 8,000 mortgages. Strong investor demand for these securities, based in part, on Aegon's proven underwriting criteria and highly rated customer service, allowed Aegon to issue approximately EUR 1.4 billion of Dutch RMBS securities at the tightest pricing since the financial crisis.
Fitch Ratings has assigned a financial strength rating of AA- to Aegon UK. Fitch considers Aegon UK core to the Aegon group, citing the company's strong position in the UK corporate and individual pensions markets, and its material contribution to the group's results.
Standard & Poor's has also recognized Aegon's UK businesses, recently changing the outlook on its A+ rating of Aegon UK from Negative to Stable. S&P specifically noted Aegon UK's strategic importance to the Aegon group and early signs of success in executing the business transformation program.
Enhance customer loyalty
Aegon believes that creating a customer-centric culture will enable it to grow further by responding to changing markets and customer behaviors. A key element of Aegon's strategy is to get closer to its customers by increasing innovation at all levels of the organization.
In the United States, a new tool called Your Financial Life was added to Transamerica.com to help those that are at or near retirement plan for the future, learn about their options and connect with others. Aegon believes that there is no such thing as a "typical" retirement and recognizes that the process of retiring can be confusing, and at times, a bit overwhelming. Your Financial Life on Transamerica.com improves the customer experience by providing a one-stop retirement resource.
In the Netherlands, Aegon recently launched Mijn Aegon, an online portal that allows customers to easily access all of their Aegon products in one overview. Using Mijn Aegon, customers can quickly view the status of their pension, their mortgage and the coverage provided under their personal and home insurance policies. Over 350,000 customers have already registered to use Mijn Aegon.
Aegon continues to implement processes and programs to help employees better understand how they contribute to the company's strategy and to recognize individual and team efforts that directly support Aegon's four strategic objectives.
In the United States, Transamerica has introduced a program to recognize the contributions made by employees in moving Aegon forward in each of its four strategic objectives. Employees can nominate other employees or teams that have demonstrated above-and-beyond effort on a specific project or a high degree of consistency in delivering value services in connection with Aegon's four strategic objectives.
The results from Aegon's third annual global employee survey show that initiatives like these are making employees feel more engaged with Aegon's strategy and more empowered to contribute to Aegon's success. Survey results continued to improve and Aegon is now consistently tracking above the financial services sector average for employee engagement and at the high performance norm for enablement.
Capital management actions improve financial flexibility
Aegon completed the redemption of USD 550 million perpetual capital securities in March, reducing outstanding debt and interest expenses. In April, Aegon issued EUR 700 million of subordinated debt, which is expected to be Tier 2 compliant under Solvency II. The 30-year securities are callable after ten years and pay a fixed coupon of 4%.
The company subsequently called for the redemption of USD 1,050 million 7.25% perpetual capital securities, effective June 15, 2014. The redemption and refinancing of debt will help the company achieve its goal of a leverage ratio of 26% to 30% and a fixed charge cover of 6 to 8 times by year-end 2014.
Agreement reached over Dutch harbor workers' pension capital
On April 14, 2014, Aegon announced that it had reached an agreement with the foundation representing Dutch harbor workers and employers (BPVH) on removing restrictions on the capital of the harbor workers' former pension fund Optas. The agreement ends a dispute that began when the Optas pension fund was transformed into an insurance company, that was subsequently acquired by Aegon in 2007.
Aegon and BPVH will file a request with the Dutch court to remove the current restriction on Optas' capital. Subject to required court approval, Aegon will make a payment of EUR 80 million to the foundation, offer more favorable pension conditions to the harbor workers and will contribute up to EUR 20 million over the coming years to help mitigate the effect of an announced reduction in the tax-free pension allowance in the Netherlands.
Underlying earnings before tax
Aegon's underlying earnings before tax in the first quarter of 2014 increased 7% compared to the first quarter of 2013 to EUR 498 million. Business growth, favorable equity markets (EUR 39 million) and the positive impact of deleveraging (EUR 10 million), more than offset investments in technology (EUR 10 million) and the impact of unfavorable currency exchange rates (EUR 11 million).
Underlying earnings from the Americas declined 1% compared to the first quarter of 2013 to EUR 302 million. Higher earnings from growth in variable annuity, mutual fund and pension balances, resulting from both financial markets and net inflows, were more than offset by one-time items and adverse currency movements. The first quarter of 2014 also included a seasonal unfavorable mortality impact of EUR 20 million.
In the Netherlands, underlying earnings increased 13% to EUR 129 million, as a result of higher investment income and lower funding costs.
Underlying earnings from Aegon's operations in the United Kingdom were up 30% to EUR 27 million in the first quarter of 2014. The positive impact of higher equity markets and improved persistency more than offset costs related to the development of the recently-launched direct-to-consumer offering on the platform, Retiready.
Underlying earnings from New Markets increased 2% to EUR 61 million. Lower earnings from Asia were more than offset by higher earnings from Aegon Asset Management and Central & Eastern Europe.
Total holding costs decreased 44% to EUR 21 million, mainly as a result of lower net interest costs following deleveraging, lower operating expenses and a one-time gain of EUR 8 million related to interest on taxes.
Net income increased to EUR 392 million as a result of higher underlying earnings and lower losses on fair value items.
Fair value items
The results from fair value items amounted to a loss of EUR 116 million. The loss was mainly driven by hedging programs without accounting match in the United States and the Netherlands. In addition, swaps related to hybrids held at the holding incurred a loss due to declining interest rates.
Realized gains on investments
Realized gains on investments slightly declined to EUR 110 million, and were primarily related to the sale of a stake in a single equity investment and portfolio repositioning in the Netherlands.
Impairments declined to EUR 8 million and were mainly related to the foreign currency residential mortgage portfolio in Hungary in the first quarter of 2014. The improvement compared to last year was the result of the favorable credit environment in the United States where impairments remained low and were more than offset by recoveries.
Other charges amounted to EUR 6 million and were primarily related to restructuring costs in the United Kingdom.
The results of run-off businesses improved to EUR 14 million as earnings in the first quarter of 2013 included a charge related to the faster than anticipated transfer of reinsurance assets.
Income tax amounted to EUR 100 million in the first quarter. The effective tax rate on underlying earnings for the first quarter of 2014 was 26%. The effective tax rate on total income was 20%, driven by tax exempt income in the United States and certain tax exempt realized gains in the Netherlands.
Return on equity
Return on equity increased to 8.4% for the first quarter of 2014, driven by higher net underlying earnings and reduced funding costs as a result of deleveraging. Return on equity for Aegon's ongoing businesses, excluding run-off businesses, amounted to 9.1% over the same period.
In the first quarter of 2014, operating expenses declined 1% to EUR 779 million mainly as a result of timing of expenses and favorable currency effects.
In the first quarter of 2014, Aegon's total sales were up 20% to EUR 2.1 billion. Gross deposits increased 35% compared to the first quarter of 2013, driven by the variable annuity and retirement businesses in the United States and Aegon Asset Management. Net outflows, excluding run-off businesses, amounted to EUR 0.9 billion. This was the result of the loss of a single large mandate in Aegon Asset Management, which was replaced by a smaller but higher margin mandate from the same client, and a one-time transfer of pension assets to the Polish government due to legislative changes.
New premium production for accident and health insurance increased 16% to EUR 261 million, mainly due to several portfolio acquisitions, which resulted from new distribution agreements. New life sales declined 8%, driven mainly by lower pension production in the United Kingdom as the first quarter of 2013 was a particularly strong quarter due to the introduction of the Retail Distribution Review. In the Americas, new life sales were up 5%, primarily driven by higher sales of universal life products with secondary guarantees, which was partly offset by adverse currency movements.
Market consistent value of new business
The market consistent value of new business declined slightly to EUR 223 million, as strong sales growth and higher margins in the United States were more than offset by lower margins on Dutch mortgages and methodology changes.
Revenue-generating investments increased 1% during the first quarter of 2014 to EUR 482 billion, driven by positive market movements.
Shareholders' equity increased EUR 1.5 billion compared to the end of the fourth quarter of 2013 to EUR 19.1 billion at March 31, 2014. This was driven by net income for the quarter and lower interest rates, resulting in higher revaluation reserves. The revaluation reserves increased by EUR 1.3 billion to EUR 4.4 billion.
Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 15.6 billion – or EUR 7.43 per common share at the end of the first quarter.
The company's gross leverage ratio improved to 31.5% in the first quarter, mainly driven by the call of perpetual capital securities. Excess capital in the holding declined to EUR 1.7 billion, resulting from the call of perpetual capital securities, interest payments and operating expenses.
Aegon's Insurance Group Directive (IGD) solvency ratio remained stable compared to year-end 2013 at 212%, as the impact of the call of perpetual capital securities was offset by earnings generated in the quarter and tightening credit spreads.
The capital in excess of the S&P AA threshold in the United States increased by USD 0.3 billion to USD 0.8 billion, driven by free cash flow generated in the first quarter of 2014.
The IGD ratio in the Netherlands, excluding Aegon Bank, remained stable at ~240%, as earnings generated in the first quarter were partly offset by higher employee pension liabilities.
The Pillar I ratio in the United Kingdom, including the with-profit fund, was flat at ~150% at the end of the first quarter of 2014.
Effective March 15, 2014, Aegon redeemed junior perpetual capital securities with a coupon of 6.875% and a principal amount of USD 550 million. On April 28, 2014, Aegon announced that it will call for the redemption of perpetual capital securities with a coupon of 7.25% issued in 2007. The redemption will be effective June 15, 2014, when the principal amount of USD 1,050 million will be repaid with accrued interest. This transaction has largely been financed by EUR 700 million subordinated notes with a coupon of 4% issued on April 25.
As a result of the calls and the new issuance, Aegon's fixed charge cover is expected to increase approximately 1.4 times on an annualized basis. Although total interest expenses will be approximately EUR 55 million lower as a result of these capital management transactions, underlying earnings before tax will be negatively impacted by EUR 28 million on an annualized basis. The interest cost on the newly issued notes is accounted for in underlying earnings while the interest on the perpetual capital securities was recorded directly in equity.
Operational free cash flows were EUR 331 million in the first quarter of 2014. Excluding one-time items of EUR (22) million and market impacts of EUR 48 million, operational free cash flows amounted to EUR 305 million.
One-time items were primarily related to temporary higher reserve strain for term and universal life business in the United States and business transformation costs in the United Kingdom. The impact of market movements during the first quarter mainly resulted from credit spread movements.
Changes in accounting policies
Effective January 1, 2014, Aegon has made voluntary changes to its accounting policies to improve the consistency, comparability and transparency of Aegon's financial results. The following changes became effective:
- Aegon has considered and sought alignment with the proposed description of deferrable policy acquisition costs in the current proposals for future insurance accounting under IFRS. Under the new accounting policy, deferred policy acquisition costs only include costs that are directly attributable to the acquisition or renewal of insurance contracts. The previous accounting policy was based on a broader definition of costs that could be deferred, including sales support costs.
- Aegon has established its longevity reserves in the Netherlands on prospective mortality tables instead of observed mortality tables. Its IFRS reserves were previously based on observed mortality tables, while actual experience was taken through underlying earnings. The adoption of prospective mortality tables ensures that Aegon's IFRS reserving for longevity is consistent with that of its regulatory solvency calculations and internal economic framework.
Aegon has applied these changes retrospectively and therefore restated its 2013 financial position, in accordance with IFRS, for reasons of comparability. As a result, shareholders' equity was negatively impacted by EUR 2.4 billion, and underlying earnings before tax were positively impacted by EUR 23 million at the date of adoption (January 1, 2014).
More details of these changes and a summary of their effects on the financial position of the company are shown in Aegon's adjusted financial supplement for the fourth quarter of 2013.