Solid business growth driving higher underlying earnings before tax
Underlying earnings up 7% to EUR 514 million, driven by growth, improved operational performance and higher equity markets; partly offset by unfavorable mortality experience and exchange rate movements
Fair value items loss of EUR 263 million, mainly due to hedging programs and model updates
Net income up 43% to EUR 343 million, resulting mainly from higher realized gains
Return on equity increases to 8.8%, or 9.6% excluding capital allocated to run-off businesses
Profitable sales growth generated by expanding distribution and product innovation
Gross deposits up 3% to EUR 13.0 billion, driven by pensions and variable annuities in US; record net deposits of EUR 6.1 billion
Life sales down 2% to EUR 511 million; growth in Asia, US and Spain offset by UK and Netherlands
Accident and health and general insurance sales 36% higher to EUR 252 million, driven by US
Higher margins drive 9% increase of market consistent value of new business to EUR 221 million
Continued strong capital position and cash flows supporting dividend
Holding excess capital and solvency ratio both stable at EUR 1.7 billion and 211% respectively
Operational free cash flows of EUR 370 million, including market impacts and one-time items of EUR 51 million
Interim dividend of EUR 0.11 per share
Statement of Alex Wynaendts, CEO
"We are pleased with the strong results that Aegon has delivered, as we build on the positive momentum achieved in previous quarters.
"We are continuing to offer innovative new products to our customers and expand our distribution – indeed we will soon be extending our successful partnership in Spain with Banco Santander to Portugal. Ever more customers are choosing Aegon, and placing their trust in our products and services to secure their financial future. As a result, our revenue-generating investments now exceed EUR 500 billion for the first time in the company's history.
"Our strong financial base is underlined by our healthy cash flows and capital position, and we are therefore pleased to announce an interim dividend of 11 euro cents per share."
Successful strategic partnership with Banco Santander in Spain extended to Portugal
Individual Savings & Retirement and Employer Solutions & Pensions divisions in the United States to be combined into a new division, Investments & Retirement
Third annual global Aegon Retirement Readiness Survey raised awareness of the need to prepare for retirement and promoted the Aegon brand
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 July, Aegon signed a 25-year agreement to distribute both protection and general insurance products through Banco Santander's network of branches in Portugal. Banco Santander Totta is one of Portugal's leading banks with more than 600 branches and over 2 million customers, and this new agreement builds on the successful start of Aegon's partnership with Banco Santander in Spain in 2013. Under the terms of the agreement, Aegon will acquire a 51% stake in Banco Santander Totta's insurance activities.
In the Netherlands, Aegon has acquired the remaining 50% stake in the online car insurance broker Onna-Onna, which has over 30,000 customers. The company focuses on female drivers, and in recent years has established a reputation for exceptional customer service. Full ownership of Onna-Onna demonstrates Aegon's commitment to utilizing innovative technology to improve the customer experience.
Deliver operational excellence
Aegon's focus on operational excellence is about identifying the most efficient and effective way to use the group's resources. This often results in cost savings that can either lead to an absolute reduction of expenses or be invested back into the business to improve the customer experience and fuel growth. On other occasions, the result is a new structure that improves cooperation and innovation.
In the United States, Aegon will combine its Individual Savings & Retirement division and its Employer Solutions & Pensions division into one group called Transamerica Investments & Retirement. The new structure will improve the coordination of distribution efforts, and supports Aegon's strategy to provide products that address customers' needs at every stage of their financial journey – from buying a house and starting a family, to retirement and elderly care.
Transamerica Retirement Solutions was recently recognized as a "Best in Class" retirement plan provider by plan sponsors in Chatham Partners' 2013 Client Satisfaction Analysis. Transamerica was ranked as a top retirement plan provider for participant services, participant statements, participant website, voice response system, and helping to fulfill fiduciary responsibilities. Overall, Transamerica Retirement Solutions received 165 "Best in Class" designations.
Enhance customer loyalty
An essential element of Aegon's strategy is getting closer to its customers by increasing innovation at all levels of the organization. Creating an ever more customer-centric culture will enable Aegon to continue growing by better anticipating and responding to changing markets and customer behaviors.
Aegon released the results of its third annual global Retirement Readiness Survey. This annual survey is based on responses from over 16,000 people in 15 countries – from China and Brazil, to the United Kingdom and United States – about how they view retirement and how they are preparing for it. The results from the 2014 survey not only underlined the clear concerns people have about their retirement, but also that many are not taking the right steps to prepare for the future. The survey attracted considerable media attention across the world helping to raise awareness, and supporting Aegon's purpose of helping people take responsibility for their financial future.
Transamerica launched the Your Client is Now a Family program, a 'digital toolkit' that includes videos, fast facts and eGuides to help financial advisors provide higher-quality advice and stay relevant in the age of instant information and online advice. The site was developed as a means to help advisors develop stronger relationships with customers by understanding the unique needs of each generation of a customer's family.
Aegon's ambition is to become the most-preferred employer in its sector. For this reason, Aegon is implementing a range of processes and programs that enable employees to better understand how they are contributing to the company's strategy and to recognize individual and team efforts that directly support its four strategic objectives.
It is important that Aegon reflects the societies in which it operates, both in terms of understanding customers and attracting and retaining the highest-caliber employees. Aegon has joined Workplace Pride, an international non-profit organization that promotes Lesbian, Gay, Bisexual and Transgender (LGBT) inclusion. The decision has proven popular with employees, and follows the creation of 'Aegon Proud', Aegon's online community that supports LGBT employees.
Aegon's underlying earnings before tax in the second quarter of 2014 increased 7% compared to the second quarter of 2013 to EUR 514 million. The main drivers of the increase were strong net deposits in previous periods and higher equity markets in the Americas (EUR 24 million), higher margins and investment income in the Netherlands (EUR 31 million) and improved persistency in the United Kingdom (EUR 12 million). These more than offset unfavorable mortality in the Americas (EUR 15 million) and the impact of unfavorable currency exchange rates (EUR 15 million).
Underlying earnings from the Americas declined 3% compared to the second quarter of 2013 to EUR 331 million. In US dollar, underlying earnings increased 2%. Higher earnings from growth in variable annuity, mutual fund and pension balances, resulting from both financial markets and net inflows, more than offset unfavorable mortality and lower earnings from fixed annuities. Compared to the previous year, the unfavorable mortality result in the second quarter was largely attributable to lower reinsurance recoveries. Aegon expects to update its mortality assumptions in the United States as part of the annual assumption review during the third quarter. This includes supplementing the company's own emerging mortality experience with the results of recent old-age industry studies, which is expected to result in more conservative mortality assumptions.
In the Netherlands, underlying earnings increased 29% to EUR 131 million. This was mainly driven by improved earnings from Non-life, higher investment income and improved margins on savings.
Underlying earnings from Aegon's operations in the United Kingdom were up 33% to EUR 32 million in the second quarter of 2014, which was mainly the result of improved persistency. Aegon expects technology expenses to increase in the second half of 2014, compared to the first half, as most of the key projects that are being undertaken reach implementation stage.
Underlying earnings from New Markets increased 27% to EUR 62 million, primarily driven by higher earnings from Central & Eastern Europe and Asia.
Total holding costs increased 19% to EUR 41 million. This was primarily the result of higher net interest costs following a debt issuance and the reclassification of a perpetual security to short-term debt from the date the call became irrevocable to the actual call date on June 15, 2014.
Net income increased to EUR 343 million due to growth of underlying earnings, higher realized gains on investments and lower impairments.
Fair value items
The results from fair value items amounted to a loss of EUR 263 million. The loss was mainly driven by the hedging programs in the United States, and model updates in the Netherlands. Aegon will implement further model updates in the third quarter of 2014.
Realized gains on investments
Realized gains on investments increased to EUR 198 million, and were primarily related to de-risking in the United Kingdom, gains on the sale of private equity investments in the Netherlands and the receipt of capital distributions on a previously impaired equity investment in the Americas.
Net impairment charges
Impairments improved to EUR 3 million and were mainly related to the foreign currency residential mortgage portfolio in Hungary due to legislation changes. The Hungarian government has indicated that it will introduce further legislation to reduce foreign currency mortgage debt, which could result in additional impairments. The improved level of impairments 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 14 million and were primarily related to restructuring costs in the United Kingdom and a fine related to past sales practices of accident insurance products.
The results of run-off businesses amounted to a loss of EUR 1 million as earnings in the second quarter were impacted by higher reinsurance claims.
Income tax amounted to EUR 88 million in the second quarter. The effective tax rate on underlying earnings was 26%. The effective tax rate on income before tax was 20%, driven by tax exempt income in the United States and in the Netherlands.
Return on equity
Return on equity increased to 8.8% for the second quarter of 2014, driven by higher net underlying earnings and lower interest expenses resulting from deleveraging. Return on equity for Aegon's ongoing businesses, excluding equity allocated to Aegon's run-off businesses, amounted to 9.6% over the same period.
In the second quarter, operating expenses declined 2% to EUR 810 million, mainly as a result of lower restructuring expenses and favorable currency effects.
In the second quarter of 2014, Aegon's total sales were up 5% to EUR 2.1 billion. Gross deposits increased 3%, as higher gross deposits in the variable annuity and retirement business in the United States more than offset lower deposits at Aegon Asset Management. Net deposits, excluding run-off businesses, were up 75% to EUR 6.2 billion, mainly resulting from a particularly strong quarter for the retirement business in the United States.
New premium production for accident and health insurance increased 36% to EUR 235 million, mainly due to several portfolio acquisitions, which were the result of new distribution agreements in the United States.
New life sales declined 2%, as higher sales of universal life products in the United States were more than offset by adverse currency movements and lower pension production in both the Netherlands and the United Kingdom. For the latter the second quarter of 2013 was a particularly strong quarter due to the introduction of the Retail Distribution Review.
Market consistent value of new business
The market consistent value of new business amounted to EUR 221 million, 9% higher than in the second quarter of 2013. Strong sales growth and higher interest rates in the United States and the growth of Dutch mortgage production were partly offset by the effect of re-pricing of the variable annuity product offering.
Revenue-generating investments increased 5% during the second quarter of 2014 to EUR 503 billion, driven by net inflows and positive market movements, crossing the half trillion euro mark for the first time in the company's history.
Shareholders' equity increased EUR 1.2 billion compared to the end of the first quarter of 2014 to EUR 20.3 billion at June 30, 2014. This was mainly driven by the effect of lower interest rates, resulting in higher revaluation reserves. The revaluation reserves increased by EUR 1.1 billion to EUR 5.4 billion. Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 15.9 billion - or EUR 7.53 per common share at the end of the second quarter.
The gross leverage ratio further improved to 31.2% in the second quarter, driven by debt refinancing and higher shareholders' equity. Excess capital in the holding remained stable at EUR 1.7 billion, as dividends paid to the holding were offset by the payment of the final dividend for 2013, debt refinancing, which reduced outstanding debt by EUR 80 million, interest payments and operating expenses.
On June 30, 2014, Aegon's Insurance Group Directive (IGD) ratio amounted to 211%, stable compared to the end of the first quarter. Earnings generated in the quarter and the benefit from a new redundant reserves financing solution in the United States, were offset by the payment of the final dividend for 2013 and the impact of declining interest rates. The capital in excess of the S&P AA threshold in the United States remained stable at USD 0.8 billion, as dividends paid to the holding were offset by earnings generated in the second quarter of 2014 and a new redundant reserves financing solution. The IGD ratio in the Netherlands, excluding Aegon Bank, remained stable at ~240%, as earnings generated in the second quarter were offset by the negative impact of model updates. The Pillar I ratio in the United Kingdom, including the with-profit fund, declined from ~150% to ~145%, as the negative impact of de-risking and business transformation costs more than offset earnings generated during the quarter.
Effective as of June 15, 2014, Aegon redeemed perpetual capital securities with a coupon of 7.25% issued in 2007 and a principal amount of USD 1,050 million, equal to approximately EUR 780 million. This transaction was largely financed by the issuance of EUR 700 million subordinated notes with a coupon of 4% on April 25.
As a result of the call and the new issuance, Aegon's fixed charge cover is expected to increase approximately 0.7 times on an annualized basis, which supports reaching Aegon's fixed charge cover target of 6 to 8 times by the end of 2014. Although underlying earnings before tax will be negatively impacted by EUR 28 million on an annualized basis, total interest expenses will be approximately EUR 27 million lower as a result of these capital management transactions. 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
Operational free cash flows were EUR 370 million in the second quarter of 2014. Excluding one-time items of EUR 76 million and market impacts of EUR (25) million, operational free cash flows amounted to EUR 319 million. The one-time items were primarily related to the benefit from the new redundant reserves financing solution in the United States of approximately EUR 220 million, which more than offset model updates in the Netherlands and the impact of de-risking in the United Kingdom. The market impacts during the second quarter were mainly the result of lower interest rates, and were partly offset by the positive impact of narrowing credit spreads.
The 2014 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 21, 2014. The record date is August 25, 2014. The election period for shareholders will run from August 27 up to and including September 12, 2014. The stock fraction will be based on the average share price on Euronext Amsterdam from September 8 through September 12, 2014. The stock dividend ratio will be announced on September 17, 2014 and the dividend will be payable as of September 19, 2014.