Q1 2015 Results | AEX:AGN | NYSE:AEG
Q1 2015 Results | AEX:AGN | NYSE:AEG
Earnings impacted by adverse claims experience
- Underlying earnings decrease to EUR 469 million as fee business growth and the stronger US dollar were more than offset by adverse claims experience in the US, higher surrenders in CEE and low interest rates
- Hedging programs drive fair value loss of EUR 159 million
- Net income amounts to EUR 316 million
- Return on equity of 6.6% and 7.2% excluding capital allocated to run-off businesses
Record net inflows, favorable markets and currency effects boost asset base to EUR 638 billion
- Record gross deposits of EUR 18.7 billion and net deposits of EUR 7.3 billion, driven by asset management, US retirement plans and NL retail savings
- Life sales increase 20% to EUR 551 million, supported by higher universal life sales in US and Asia
- Accident & health and general insurance sales 18% higher to EUR 329 million
- Profitable sales with MCVNB of EUR 140 million despite lower interest rates
Solid capital position supported by strong cash flows
- Solvency ratio increases to 216%; holding excess capital rises to EUR 1.4 billion
- Gross leverage ratio improves to 27.8%, providing additional capital flexibility
- Operational free cash flows excluding market impacts and one-time items of EUR 339 million
CEO Alex Wynaendt's statement
"Aegon reported disappointing underlying earnings this quarter, primarily due to adverse claims experience in the US. While the seasonal effect on claims was expected, both the number of claims and amounts were higher than anticipated. Net income was nevertheless solid, amounting to over EUR 300 million.
"I am pleased that we maintained the strong momentum in growing our business profitably, despite the persistent low interest rate environment. Moreover, the record sales that we achieved across the company highlight the trust we enjoy from a growing number of customers who are choosing Aegon to help them secure their financial futures.
"During the last quarter, we made substantial progress in executing our strategy and capitalizing on new distribution agreements. Looking ahead, we have every confidence that the actions we are taking across our businesses will further strengthen our growth prospects for the future."
Strategic Highlights
- Aegon's online bank Knab wins prestigious international Celent Award
- Venture fund providing insight into new industry-changing technologies
- Aegon UK's platform reaches 100,000 customers
Aegon's ambition
Aegon's aim to be a leader in all of its chosen markets is 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 has agreed with its joint venture partners in India to increase its stake from 26% to 49%. The move follows a recent revision to India's insurance laws that enables foreign companies to own up to 49% of insurance joint ventures. The transaction is subject to regulatory approvals. Aegon and its joint venture partners have operated a life insurance business in India since 2008, and have a leading position in the Indian online life insurance market.
In the Netherlands, Aegon has completed a thorough business review and will restructure its non-life business to focus exclusively on the retail and SME segments of the market, which includes property & casualty and disability insurance. Aegon will exit the proxy channel entirely and is considering strategic options for its commercial lines business. These actions are expected to result in improved non-life returns in the future.
Deliver operational excellence
Aegon is one of the first among its peers that launched a dedicated venture fund investing in start-ups developing new technologies for the financial sector. The fund size is EUR 100 million and working with these companies gives Aegon greater insights into new developments and helps Aegon play an active role in today's rapidly changing environment.
Knab, Aegon's innovative online bank in the Netherlands, was the first Dutch bank to win the prestigious international Celent Model Bank award. The Celent Model Bank Award is given in recognition of a company's effective use of technology to meet customer needs. Knab's popularity continues to grow, with an increase in the number of customers of over 40% during the quarter.
Enhance customer loyalty
Aegon enhanced its Alternative Lump Sum Offering (ALSO) program for customers in the United States who purchased certain variable annuity products with Guaranteed Minimum Income Benefits (GMIB). This program offers these customers a voluntary settlement option increasing their account value if they surrender. In the first quarter of 2015, customers received USD 0.2 billion of combined account value and ALSO benefit upon surrender.
In the Netherlands, Aegon has made significant improvements to its popular mobile application, which now allows customers to view their non-life insurance coverage, report claims and find nearby repair centers. In addition, Aegon has started a trial to allow its customers to include live video services from their mobile device when submitting damage claims. This is expected to reduce processing times, meaning an improved customer experience by helping to get customers the money they need quicker than ever.
In the United Kingdom, Aegon has upgraded over 20,000 customers to its platform in the first quarter of 2015, with more to follow. This is an important step in the development of the platform, as customers experience better service, lower fees and are able to take advantage of a number of retirement readiness tools offered exclusively on the platform. In early April, the total number of customers on Aegon's platform surpassed the 100,000 mark.
Aegon Asia has launched a new customer relationship platform to support its fast-growing life insurance business in Hong Kong and Singapore. The new technology provides a simpler, more scalable platform which is helping Aegon get closer to its customers and provides the necessary tools to deliver an improved customer experience.
Operational Highlights
See page 3 of our Financial Tables for our Financial Overview and Revenue-generating investments.
Underlying earnings before tax
Aegon's underlying earnings before tax in the first quarter of 2015 amounted to EUR 469 million.
The main drivers for the 6% decline compared with the first quarter of 2014 were adverse claims experience, negative persistency and the negative impact related to lower than anticipated reinvestment yields in the United States and Asia (EUR 110 million), higher surrenders in Central and Eastern Europe (EUR 13 million) and the reduction in recurring earnings resulting from the assumption changes and model updates implemented in the third quarter of 2014 (EUR 25 million).
These more than offset higher earnings resulting from growth in variable annuity, pension and asset management balances (EUR 39 million) and favorable currency movements (EUR 73 million).
Underlying earnings from the Americas were down to EUR 290 million. The positive impact on earnings as a result of growth in variable annuity and pension balances and the stronger US dollar were more than offset by the adverse experience described above.
In the Netherlands, underlying earnings increased to EUR 131 million. This was mainly driven by higher investment income and lower funding costs, which were partly offset by higher non-life claims.
Underlying earnings from Aegon's operations in the United Kingdom were up 42% to EUR 38 million in the first quarter of 2015, which was the result of lower expenses and positive market movements.
Underlying earnings from New Markets declined to EUR 51 million. Growth at Aegon Asset Management, which was driven by an increase in third-party business, was more than offset by higher surrenders in Poland following product changes implemented in the fourth quarter of 2014 and divestments in France and Spain.
Total holding costs increased to EUR 42 million. This was primarily the result of higher net interest costs of EUR 7 million following a debt issuance to refinance a perpetual bond in the second quarter of 2014, the cost of which was previously directly accounted for through shareholders' equity. In addition, higher Solvency II related expenses and the non-recurrence of a gain from interest on taxes of
EUR 8 million recorded in the first quarter of 2014 also had a negative impact.
Net income
Net income amounted to EUR 316 million due to lower underlying earnings and a higher loss from fair value items.
Fair value items
The loss from fair value items amounted to EUR 159 million. This loss was mainly driven by hedging programs in the United States and interest rate swaps on perpetuals at the holding, which were impacted by a drop in the Dutch government rate and increased interest rate volatility. This was partly offset by gains related to interest rate volatility in the Netherlands.
Realized gains on investments
Realized gains on investments increased to EUR 119 million and were primarily related to hedge rebalancing in a low rate environment.
Impairment charges
Impairments remained low as a result of the favorable credit environment and amounted to EUR 11 million.
Other charges
Other charges totaled EUR 1 million. Charges in the Netherlands, which were primarily related to a restructuring provision for the non-life business of EUR 11 million, were mostly offset by charges for policyholder taxes in the United Kingdom.
Run-off businesses
The result from run-off businesses amounted to EUR 8 million.
Income tax
Income tax amounted to EUR 109 million in the first quarter. The effective tax rate on underlying earnings was 27%.
Return on equity
Return on equity was 6.6% in the first quarter of 2015, due to lower underlying earnings. Return on equity for Aegon's businesses, excluding the run-off businesses, amounted to 7.2% over the same period.
Operating expenses
In the first quarter, operating expenses increased 16% to EUR 902 million, driven by a stronger US dollar, higher investments in technology-related initiatives, higher Solvency II costs and an increase in defined benefit expenses. At constant currencies, the increase was 4%.
Sales
In the first quarter of 2015, Aegon's total sales were up 32% to EUR 2.8 billion, the result of a stronger US dollar and Aegon's focus on growing profitable sales in variable annuities, pensions and indexed universal life products. Gross deposits increased 39%, driven by higher pension and variable annuity deposits in the United States, higher deposits in Aegon Asset Management and the strong growth of savings deposits at Knab in the Netherlands.
Net deposits, excluding run-off businesses, improved to EUR 7.5 billion, due to higher inflows in all product categories. New life sales were up 20% to EUR 551 million, mainly due to increased sales of universal life products in the United States and Asia, and favorable currency movements.
New premium production for accident & health insurance increased 18% to EUR 307 million, as a lower contribution from portfolio acquisitions was more than offset by higher supplemental health sales and a stronger US dollar.
Market consistent value of new business
The market consistent value of new business amounted to EUR 140 million. The positive effect of sales growth and product adjustments in the United States was more than offset by the negative impact of lower interest rates.
Revenue-generating investments
Revenue-generating investments increased 14% during the first quarter of 2015 to EUR 638 billion, driven by favorable market impacts, currency movements and net inflows.
Capital management
Shareholders' equity increased EUR 3.1 billion compared with the end of the fourth quarter of 2014 to EUR 27.4 billion on March 31, 2015. This increase was mainly due to lower interest rates, which resulted in higher revaluation reserves, and favorable currency movements.
The revaluation reserves were up by EUR 1.6 billion to EUR 9.9 billion. Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, increased to EUR 19.7 billion – or EUR 9.33 per common share – at the end of the first quarter. This increase was driven by net income generated during the quarter and favorable currency movements.
The gross leverage ratio improved to 27.8% in the first quarter, well within the target range of 26-30%. The further progress was driven by higher shareholders' equity net of revaluation reserves and defined benefit plan remeasurements, as well as favorable currency movements.
Excess capital in the holding increased to EUR 1.4 billion. The EUR 350 million proceeds of the divestment of La Mondiale Participation were partly offset by the effect of currency hedges, interest payments and operating expenses.
Aegon's Insurance Group Directive (IGD) solvency ratio increased to 216% in the first quarter, mainly driven by earnings generated in the quarter. The capital in excess of the S&P AA threshold in the United States rose to USD 1.5 billion, due to tax benefits and earnings generated in the first quarter of 2015. In the Netherlands, the IGD ratio, excluding Aegon Bank, increased to ~235%, driven by a favorable impact of market movements. The Pillar I ratio in the United Kingdom, including the with-profit fund, declined slightly to ~135%, as the negative impact of downgrades in the investment portfolio more than offset earnings generated during the quarter.
Cash flows
Operational free cash flows were EUR 853 million in the first quarter of 2015. Excluding one-time items of EUR 273 million and market impacts of EUR 241 million, operational free cash flows amounted to EUR 339 million. The one-time items were primarily related to tax benefits in the Americas. The market impacts during the first quarter were mainly related to credit spread and interest rate movements in the Netherlands.
