Underlying earnings up 7% to EUR 491 million, driven by business growth, higher equity markets and one-time items, partly offset by unfavorable currency exchange rates
Fair value items loss of EUR 260 million, due to impact of rising equity markets and interest rates on hedging programs, and effect of tightening credit spreads on valuation of liabilities
Net income declines to EUR 174 million, mainly as a result of fair value losses
Return on equity down to 6.9%, driven by the increase of shareholders' equity
Continued high level of deposits, driven by variable annuities, pensions and asset management
Gross deposits up 15% to EUR 10.6 billion, driven by variable annuities and pensions in US and asset management; net deposits, excluding run-off businesses, more than double to EUR 2.0 billion
New life sales of EUR 480 million; down 29% due to exceptional sales level in UK and NL last year
Accident & health and general insurance sales decrease 6% to EUR 199 million due to lower production in the Netherlands and unfavorable currency exchange rates
Market consistent value of new business increases significantly to EUR 268 million, as a result of higher interest rates, increased sales volumes and continued management actions to improve margins
Capital position remains strong; supported by operational cash flows
Solvency ratio of 212%, reflecting strong local capital positions
Holding excess capital increases to EUR 2.2 billion; EUR 0.9 billion committed to deleveraging in 2014
Operational free cash flows of EUR 228 million; market impacts and one-time items of EUR (76) million
Proposed final dividend of EUR 0.11 per share – total 2013 dividend increase of 5% compared to 2012
Statement of Alex Wynaendts, CEO
"Solid results this quarter completed a good year for Aegon and provide clear evidence that we are delivering on our objective of growing our business profitability. Again we achieved a strong set of underlying earnings, sales, and value of new business. Net income was impacted by fair value losses, mostly related to hedges to protect our capital position. Capital levels and cash flows remain strong, enabling us to continue to grow our business and enhance our ability to better serve our customers.
"We continue to innovate at all levels of the organization to better engage with our customers and improve both the efficiency of our business and the competitiveness of our products. Notable actions this quarter included a second longevity transaction in the Netherlands to reduce risk, further enhancing our leadership in the Dutch pension market. We also received further recognition for exceptional products and levels of service in our other key markets in the United States and the United Kingdom.
"We are pleased to announce a final dividend of eleven euro cents per share, in line with our stated objective of sustained dividend growth, in what remains an uncertain economic environment. Looking ahead, we are confident that the actions we have taken, together with the strength of our businesses and capital position, will allow us to continue to meet the growing needs of our customers across all our businesses."
Second capital markets transaction reduces longevity risk in the Netherlands
Accounting changes implemented per January 1, 2014, improve consistency, comparability and transparency; call of USD 550 million capital securities
Awards won across the organization for service and innovation
Aegon's ambition 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.
Optimize portfolio Aegon completed its second longevity transaction, laying off additional longevity risk and solidifying its leadership position in the Dutch pension market. The transaction covers EUR 1.4 billion of reserves in the Netherlands and follows the longevity hedge on EUR 12 billion of reserves completed in January 2012. Aegon will continue to pursue ways to develop this market and manage its longevity risk efficiently.
In the United Kingdom, Aegon fully integrated Novia Investment Service, a company set up in 2011 to build and administer the Aegon Retirement Choices (ARC) platform, which now has over GBP 1.3 billion of assets under management. Aegon will obtain all intellectual rights to the platform and retain the talent involved in its development. The move further emphasizes Aegon's commitment to the UK market.
A new investment fund, Dutch Mortgage Fund, has been established by Aegon Asset Management, leveraging Aegon's retail mortgage expertise in the Netherlands to provide a new asset class to investors. This longer duration asset class is particularly attractive to pension funds and has already attracted more than EUR 700 million of deposits.
Deliver operational excellence Aegon has successfully executed on cost savings programs throughout the organization over the past few years. At the same time, the company continues to make investments in new technology and processes that will ensure continued improvements in operational efficiency.
In the Netherlands, after making investments to improve its accessibility and efficiency, the Aegon Intermediary Portal (AIP) received more than one million visitors, up 32% from 2012. The platform was redesigned to make it easier for intermediaries to submit applications and make changes to policyholder accounts – resulting in higher client satisfaction and reduced long-term expenses.
An example of the long-term benefit of investments in technology is Aegon's pension platform in the United States. Investments made a decade ago to develop a fully scalable platform have contributed to higher than market-average growth and consistent top scores for client satisfaction. Once again in 2013, Transamerica Retirement Solutions was a leader in the Plansponsor defined contribution awards, winning 47 "Best in Class" cups.
Aegon will continue to make investments in technology and process improvements as part of its focus on becoming a leader in its chosen markets.
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 China, Aegon-CNOOC received three awards reflecting greater focus on service and product innovation: the 2013 Service Innovation award from the Shanghai Excellent Service Insurance Corporation; the Most Innovative Product award from the 2013 Insurance Industry Billboard; and the Best Growing Potential award from the 2013 Insurance Corporation.
In India, where Aegon Religare is the market leader in online insurance, the company's drive to improve the customer experience led to a special "customer engagement day" in which around 6,000 customers were invited to Aegon Religare branch offices. Feedback received from such activities lead to better service levels and more customer-driven products. One such product is iGuarantee, India's first online guaranteed insurance plan. The product provides the security customers are looking for with a simple application process involving only three questions and no medical examination.
In the Netherlands, Aegon Bank has improved its score on the AFM (Authority for the Financial Markets) annual review of how well banking products meet customers' interests from below to above industry average in 2013. Also in the Netherlands, Aegon won the "Gouden Spreekbuis" awards for the Best Mortgage Lender and Best Mortgage Broker, recognized for its exceptional service toward both consumers and intermediaries.
Empower employees Aegon continues to implement processes to help employees better understand how they contribute to Aegon's strategy. The success of these initiatives is measured, in part, with the annual global employee survey, which was conducted for the third consecutive year with an impressive 88% of employees throughout the world participating.
In the United States, Transamerica Retirement Solutions was named one of the "Best Places to Work" in the money management industry (Pensions & Investments' Magazine). The magazine noted that even during a year that saw the merger of three divisions and two sales forces, employees remained well-informed and felt part of the process.
Accounting changes and call of capital securities On January 22, 2014, Aegon announced changes to its accounting policies related to deferred policy acquisition costs and longevity reserves. The changes are effective as of January 1, 2014, and aim to improve the consistency, comparability and transparency of Aegon's financial results. The retrospective adoption of these accounting changes is expected to decrease shareholders' equity by between EUR 2.2 and 2.5 billion per January 1, 2014, and increase underlying earnings before tax by approximately EUR 80 million in 2014. Aegon will publish its restated accounts in mid-April 2014.
To mitigate the adverse effect of the accounting changes on Aegon's gross financial leverage ratio, the company has called for the redemption of USD 550 million perpetual capital securities, effective March 15, 2014. The call of the perpetual capital securities will reduce the group IGD solvency ratio by approximately six percentage points but the reduced leverage and interest expenses will keep the company on track to manage its gross financial leverage ratio and fixed charge coverage to within its target range by the end of 2014.
Underlying earnings before tax Aegon's underlying earnings before tax in the fourth quarter of 2013 increased 7% to EUR 491 million compared to the fourth quarter of 2012. Business growth and deleveraging, the positive effects of favorable equity markets and the net positive impact of one-time items, more than offset the impact of unfavorable currency exchange rates.
Underlying earnings from the Americas declined 7% compared to the fourth quarter of 2012 to EUR 327 million. This was mainly due to one-time charges of EUR 25 million and unfavorable currency exchange rates, which more than offset growth in Variable Annuities and Pensions. At constant currencies, underlying earnings declined 3%.
In the Netherlands, underlying earnings increased to EUR 110 million. This was mainly the result of a benefit resulting from observed mortality of EUR 25 million, which more than offset a lower result from Non-life, which was caused mainly by a major storm in October and large fires.
Underlying earnings from Aegon's operations in the United Kingdom amounted to EUR 21 million in the fourth quarter of 2013. The positive impact of higher equity markets and EUR 6 million of non-recurring items was more than offset by investments in technology and adverse persistency.
Underlying earnings from New Markets declined 6% to EUR 49 million. Higher earnings in Asia were more than offset by the introduction of the insurance tax in Hungary and divestments.
Total holding costs decreased 73% to EUR 15 million, mainly as a result of lower net interest costs following debt redemptions, lower operating expenses and a one-time gain of EUR 18 million related to interest on taxes.
Net income Net income decreased to EUR 174 million as higher losses from fair value items and lower other income more than offset higher underlying earnings and lower impairments.
Fair value items The results from fair value items amounted to a loss of EUR 260 million. The loss was mainly driven by macro hedges in the Americas and the guarantee portfolio in the Netherlands.
The loss on fair value hedges without an accounting match under IFRS was EUR 123 million. This was mainly driven by the loss on the equity hedges in the Americas, which have been set up to protect Aegon's capital position, as a result of the strong equity market performance in the fourth quarter of 2013. Aegon has restructured its equity hedges as the equity collar hedge expired at the end of the year. An annualized equity market return of 8%, in line with Aegon's economic assumptions, would result in a quarterly pretax loss of approximately EUR 45 million.
Fair value hedging with an accounting match, which include the hedges on Aegon's GMWB variable annuities block and on guarantees provided in the Netherlands, contributed to a loss of EUR 148 million. This was mainly the result of model refinements and the tightening of Aegon's credit spread.
Fair value investments outperformed by EUR 67 million, mainly driven by alternative investments. Other fair value items contributed to a loss of EUR 56 million, primarily the result of the negative impact of the decline of Aegon's credit spread on the valuation of the outstanding medium term notes.
Realized gains on investments Realized gains on investments amounted to EUR 104 million and were primarily driven by adjustments to the asset mix in the Netherlands to bring it in line with the new regulatory yield curve and selective de-risking.
Impairment charges Impairments improved to EUR 1 million, as impairment losses were largely offset by recoveries on investments in subprime residential mortgage-backed securities in the United States and model refinements on mortgages in the Netherlands.
Other income Other charges amounted to EUR 33 million. Restructuring charges were EUR 34 million, and mainly driven by the Americas and the United Kingdom. During the fourth quarter, the Polish parliament approved the new pension legislation, with a few amendments. These were more adverse than anticipated, resulting in an additional impairment on intangibles of EUR 10 million.
Run-off businesses The results of run-off businesses improved to EUR 14 million, mainly due to a non-recurring DAC true-up of EUR 11 million in BOLI/COLI.
Income tax Income tax amounted to EUR 141 million in the fourth quarter. The effective tax rate on underlying earnings for the fourth quarter of 2013 was 26%. The effective tax rate on total income was 45 driven by a tax charge of EUR 50 million in the Americas related to hedging losses in 2013.
Return on equity Return on equity declined to 6.9% for the fourth quarter of 2013, as slightly higher net underlying earnings were offset by the increase of shareholders' equity compared to the fourth quarter of 2012. Return on equity for Aegon's ongoing businesses, excluding the run-off businesses, amounted to 7.6 over the same period.
Operating expenses In the fourth quarter, operating expenses increased 2% to EUR 850 million mainly as a result of higher technology investments and restructuring costs in the Americas and United Kingdom.
Sales Compared to the fourth quarter of 2012, Aegon's total sales declined 4% to EUR 1.7 billion as higher gross deposits were more than offset by lower new life sales. Gross deposits increased 15%, driven by the variable annuity and retirement business in the United States and Aegon Asset Management. Net deposits, excluding run-off businesses, more than doubled to EUR 2.0 billion and were primarily driven by variable annuity deposits in the United States and higher net deposits in Aegon Asset Management. New life sales were down 29%, driven mainly by lower pension production in the United Kingdom and the Netherlands as production was exceptionally high in the fourth quarter of 2012. In addition, in the Americas, new life sales were down 19%, primarily driven by lower universal life sales due to product withdrawals and product redesign, resulting from the focus on value creation, as well as adverse currency movements.
Market consistent value of new business The market consistent value of new business increased strongly by 31% to EUR 268 million mainly as a result of strong sales growth and higher margins in the United States.
Revenue-generating investments Revenue-generating investments increased 1% during the fourth quarter of 2013 to EUR 475 billion, driven by continued net inflows and higher equity markets. At constant currencies, the increase was 2%.
Capital management Shareholders' equity decreased EUR 0.4 billion compared to the end of the third quarter of 2013 to EUR 20.0 billion at December 31, 2013. This was driven by unfavorable currency exchange rates and higher interest rates, resulting in lower revaluation reserves. The revaluation reserves declined by EUR 0.4 billion to EUR 3.0 billion. Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 17.7 billion.
The gross leverage ratio was stable at 30.1% in the fourth quarter. Excess capital in the holding increased to EUR 2.2 billion, as dividends of EUR 0.8 billion received mainly from the Americas and Netherlands, more than offset interest payments, operating expenses and a capital contribution to the United Kingdom of EUR 0.2 billion.
Shareholders' equity per common share, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 8.40 at December 31, 2013.
At December 31, 2013, Aegon's Insurance Group Directive (IGD) ratio increased to 212%, mainly driven by capital generation in the fourth quarter. The capital in excess of the S&P AA threshold in the United States decreased by USD 0.4 billion to USD 0.5 billion, as earnings for the quarter were more than offset by a dividend payment to the holding. The IGD ratio, excluding Aegon Bank, in the Netherlands was slightly down to ~240%, mainly driven by a dividend payment to the holding. The Pillar I ratio in the United Kingdom, including the with-profit fund, was ~150% at the end of the fourth quarter of 2013. This was up from ~140% at the end of the third quarter of 2013, mainly reflecting EUR 0.2 billion of capital received from the holding.
On January 22, 2014, Aegon announced that it will call for the redemption of junior perpetual capital securities with a coupon of 6.875% issued in 2006. The redemption will be effective March 15, 2014, when the principal amount of USD 550 million will be repaid with accrued interest.
Cash flows Operational free cash flows were EUR 228 million in the fourth quarter of 2013. Excluding one-time items of EUR (113) million and market impacts of EUR 36 million, operational free cash flows amounted to EUR 304 million. The one-time items included unfavorable timing of reserve financing for term and universal life business in the Americas, valuation adjustments in the Netherlands and project costs in the United Kingdom. The impact of market movements during the fourth quarter mainly resulted from lower credit spreads.
Aegon received EUR 0.8 billion of dividends from its operating units during the fourth quarter of 2013, split between EUR 0.4 billion from the Americas, EUR 0.3 billion from the Netherlands and EUR 0.1 billion from Aegon Asset Management and Central & Eastern Europe. A contribution of EUR 0.2 billion was paid to the United Kingdom.
Final dividend 2013 At the Annual General Meeting of Shareholders on May 21, 2014, the Supervisory Board will, absent unforeseen circumstances, propose a final dividend for 2013 of EUR 0.11 per common share. The final dividend will be paid in cash or stocks at the election of the shareholder. Aegon will neutralize the dilutive effect of the stock dividend on earnings per share. The value of the stock dividend will be approximately equal to the cash dividend.
If the proposed dividend is approved by shareholders, Aegon shares will be quoted ex-dividend on May 23, 2014. The record date for the dividend will be May 27, 2014. The election period will run from May 30 up to and including June 13, 2014. The stock fraction for the stock dividend will be based on the average price for the Aegon share on the Euronext Amsterdam stock exchange for the five trading days from June 9 through June 13, 2014. The dividend will be payable as of June 20, 2014.
Annual General Meeting of Shareholders The record date for attending and voting at the Annual General Meeting of Shareholders of Aegon N.V. is April 23, 2014. The agenda for this meeting will be published on April 9, 2014.