Aegon reports third quarter 2015 results

"During the third quarter of the year, Aegon's earnings were impacted by assumption changes, our ongoing model refinement program, and the anticipated book loss on the sale of our low-return business in Canada.

"At the same time, sales for the quarter remained strong, particularly in our fast-growing US retirement plan and asset management businesses.

"We are pleased to have strengthened our position in one of our key growth areas, becoming a top ten provider in the US retirement sector through the acquisition of Mercer's defined contribution record-keeping business. This strategic development demonstrates our determination to grow and diversify our customer base and expand our offering of attractive fee-based retirement solutions.

"The progress we have recently made in preparing for Solvency II gives us confidence that we are well-positioned to operate successfully in this new regulatory framework.

"We remain committed to delivering value to customers and shareholders alike, and look forward to sharing our plans in this respect at our upcoming Analyst & Investor Conference in January."

• Acquisition of Mercer's US defined contribution record-keeping business
• Highest-ever score obtained in the Dow Jones Sustainability Indices
• UK launches new Retiready Stability fund
• Aegon number one insurer in 2015 Best Employer's list in the Netherlands

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

On September 25, Aegon announced the acquisition of Mercer's US defined contribution record-keeping business. Mercer is widely recognized for its best-in-class solutions in the large corporate benefits administration market. The transaction complements Transamerica's current service offering, which has experienced success and growth in the large markets with a primary focus on the not-for-profit segment.

The number of retirement plan participants serviced by Transamerica will increase by 917,000 to approximately 5 million, and assets under administration will increase by USD 71 billion to approximately USD 216 billion (Pro forma data as of August 31, 2015 and as communicated at time of announcement). In addition, Transamerica will also become the preferred defined contribution record-keeping provider for Mercer's total benefit outsourcing and total retirement outsourcing clients. The transaction is anticipated to be closed in the fourth quarter of 2015.

On September 2, Aegon completed the sale of Clark Consulting Group – its Bank-Owned Life Insurance (BOLI) distribution and servicing unit in the United States – to Greenspoint Capital and the Newport Group, following regulatory approval. The agreement to sell Clark Consulting for USD 177.5 million (EUR 160 million) was announced on July 10, 2015. Clark Consulting was a distinct entity within the BOLI/COLI insurance business that is currently in run-off.

On November 3, an agreement was reached to sell certain assets of Transamerica Financial Advisors, Inc. to Signator, a John Hancock affiliate. Transamerica Financial Advisors is a full-service, independent broker-dealer and registered investment advisor with around 1,100 advisors and 90 employees. John Hancock is an independent broker-dealer and unit of Manulife Financial Corporation. It is anticipated that the transaction will close in the second quarter of 2016, subject to regulatory approvals. Terms of the transaction were not disclosed.

Deliver operational excellence

Aegon received its highest-ever score in the Dow Jones Sustainability Indices, underlining the progress made in becoming a more sustainable company. Aegon scored 83 points in the 2015 Indices, compared with an average of 48 for the insurance industry as a whole. In addition to being Aegon's highest-ever score, the company also outperformed 94% of its peers in the sector

In the UK, Aegon enhanced its digital life insurance solution, Simply Life, making it even more accessible and attractive to a wider number of clients. The process, which already has a very high immediate acceptance rate of over 80%, will introduce manual underwriting if an online decision is unavailable. Simply Life is a life only protection product that covers up to GBP 500,000 for customers aged between 18 and 49 with healthy lifestyles. Simply Life offers both customers and advisors a quick and easy-to-use product to meet protection needs.

Enhance customer loyalty

In support of Aegon's purpose to help people take responsibility for their financial future, Aegon teamed up with the National Financial Educators Council to launch the Transamerica Financial Educators Academy. With the goal to promote greater personal financial knowledge in the United States by teaching the basics of successful money management, the Academy offers an effective process for individuals to become certified to teach others in their communities. This enables them to help others improve their financial outlook and become more confident about their financial future.

In the UK, Aegon launched 'Retiready Stability', a new fund for pension customers on its platform that broadens the range of available investments. This gives investors the choice of five funds, ranging from low to higher risk. The new option is a very low risk fund, and is designed for investors seeking to preserve their pension savings, typically before taking retirement income.

In Spain, Aegon launched a new independent broker service, Aegon Activos. The new brokerage will provide customers with access to over 30 carefully selected mutual funds and pension plans, offered by 20 national and international fund managers, life insurance and savings companies. The launch of Aegon Activos reflects Aegon's commitment to provide personalized advice in planning and financial protection, with high added value in terms of funds. In addition, it enables Aegon to expand its product offering in line with the company's multichannel strategy, which provides customers with a portfolio of diversified services tailored to their individual savings and investment needs.

Aegon Bank in the Netherlands entered into a partnership with Germany's leading online peer-to-peer loan marketplace, auxmoney. The partnership between auxmoney and Aegon Bank grew out of Aegon's December 2014 venture investment in the company. In addition to the equity stake Aegon already owns in the company, Aegon Bank has committed to provide EUR 150 million funding for loans on the auxmoney platform. Its platform provides a unique solution to connect and facilitate retail-focused loans directly between borrowers and lenders. Aegon's investment on auxmoney's lending platform is a strategic move, as crowd lending marketplaces are becoming increasingly popular with investors.

Empower employees

In the Netherlands, Aegon was named 1st among insurance companies and 25th overall in the list for companies with over 1,000 employees in the 2015 Best Employer List, conducted by Effectory and Intermediair. The research for Best Employer in the Netherlands is the biggest and best-known of its kind. Over 200,000 employees judge more than 300 employers based in the Netherlands. These high rankings underline the progress Aegon has made in becoming a preferred employer.

Global Systemically Important Insurer

The Financial Stability Board announced on November 3, 2015, that it has designated Aegon as one of a group of nine global systemically important insurers (G-SII). Aegon will continue to engage with supervisors in the upcoming consultations on both the methodology applied to determine the systemic level of insurance companies and on the definition of non-traditional insurance and non-insurance activities. In the meantime, Aegon will work closely with the regulatory authorities to comply with the G-SII framework once it is finalized.

See page 3 of our Financial Tables for our Financial Overview and Revenue-generating investments.

Assumption changes and model updates

Aegon reviews its assumptions in the Americas and Asia annually in the third quarter, which resulted in adjustment to its actuarial and economic assumptions. In addition, as part of an ongoing commitment to deliver operational excellence, the company reviews and enhances its models where necessary. These assumption changes and model updates on balance accounted for charges of EUR 204 million in the third quarter of 2015. The actuarial assumption changes reduced underlying earnings by EUR 96 million, the economic assumption changes positively impacted fair value items by EUR 101 million and charges for model updates amounted to EUR 209 million. As of this quarter, model updates are included in Other charges and are no longer included in underlying earnings.

Underlying earnings before tax

Aegon's underlying earnings before tax in the third quarter of 2015 were EUR 436 million, including charges for actuarial assumption changes of EUR 96 million. Excluding assumption changes and model updates, earnings increased 4%. Favorable currency movements and positive mortality experience in the United States more than offset the reduction in recurring earnings resulting from the assumption changes and model updates implemented in the United States and Asia, lower earnings from fixed annuities and the impact of divestments.

Underlying earnings from the Americas were EUR 243 million and included charges for actuarial assumption changes of EUR 96 million. Lower charges for assumption changes, the absence of model updates and the stronger US dollar more than offset the recurring impact of the actuarial assumption changes implemented this quarter, lower fixed annuity earnings and the divestment of Canada.

In the Netherlands, underlying earnings increased 6% to EUR 135 million, driven by higher investment income and lower funding costs.

Underlying earnings from Aegon's operations in the United Kingdom were stable in the third quarter of 2015 at EUR 27 million, as favorable currency movements were offset by adverse market movements and lower fees.

Underlying earnings from New Markets were up 74% to EUR 69 million. This increase was driven by higher asset management and performance fees, favorable one-time items, mainly related to higher than anticipated investment yields, and the absence of assumption changes and model updates.

Total holding costs remained stable at EUR 38 million.

Net income

The net loss amounted to EUR 524 million, primarily caused by the EUR 751 million book loss from the sale of the Canadian business.

Fair value items

The loss from fair value items amounted to EUR 103 million. This loss was mainly driven by hedging programs in the United States, primarily the result of ineffectiveness of the macro equity hedge program. This more than offset the positive impact of EUR 101 million from assumption changes, which were related to adjustments to the discount rate of variable annuity liabilities.

Realized gains on investments

Realized gains on investments declined to EUR 36 million and were driven by normal trading activity in the Netherlands.

Impairment charges

Gross impairments remained low as a result of the favorable credit environment and amounted to EUR 12 million in the third quarter of 2015.

Other charges

Other charges amounted to EUR 950 million. These were primarily due to the book loss on the divestment of the Canadian insurance business of EUR 751 million. In addition, the ongoing model review resulted in charges of EUR 209 million, mainly related to the universal life business in the United States.

Run-off businesses

Earnings from run-off businesses increased to EUR 28 million, due to favorable mortality and lapse experience.

Income tax

Income tax amounted to a positive EUR 41 million in the third quarter, driven by tax credits in especially the United States. The effective tax rate on underlying earnings was 19%.

Return on equity

Return on equity was 6.8% in the third quarter of 2015. Return on equity excluding the charges for actuarial assumption updates in the United Stated and Asia amounted to 8.1% over the same period.

Operating expenses

In the third quarter, operating expenses increased by 10% to EUR 912 million. This was driven by a stronger US dollar and higher defined benefit expenses, which was the result of lower interest rates. At constant currencies, the increase was 1%.

Sales

Aegon's total sales increased 12% to EUR 2.6 billion in the third quarter of 2015, the result of a stronger US dollar, higher asset management deposits and increased indexed universal life sales. Gross deposits increased 27%, driven by higher deposits in Aegon Asset Management and strong growth in bank deposits in the Netherlands. Net deposits, excluding run-off businesses, increased to EUR 4.5 billion due to higher net inflows in Aegon Asset Management. New life sales were down 21% to EUR 435 million, as higher indexed universal life sales in the United States and favorable currency movements were more than offset by the impact of the withdrawal of the universal life secondary guarantee product in the United States and lower pension sales in the Netherlands and United Kingdom. New premium production for accident & health and general insurance declined to EUR 230 million, as the effect of a stronger US dollar was more than offset by fewer portfolio acquisitions in the United States.

Market consistent value of new business

The market consistent value of new business amounted to EUR 125 million. The positive effect of the stronger US dollar and product adjustments in the United States were more than offset by the negative impact of lower life sales and interest rates.

Revenue-generating investments

Revenue-generating investments declined by 1% during the third quarter of 2015 to EUR 635 billion. This was due to unfavorable market movements resulting from lower equity markets, which more than offset net inflows.

Capital management

Shareholders' equity declined by EUR 1.0 billion during the third quarter and amounted to EUR 24.1 billion on September 30, 2015. Revaluation reserves increased slightly by EUR 0.1 billion to EUR 7.4 billion. Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, declined to EUR 18.2 billion – or EUR 8.57 per common share – at the end of the third quarter. This was caused by the loss generated in the quarter and the payment of the 2015 interim dividend.

The gross financial leverage ratio increased to 28.8% in the third quarter, driven by the book loss on the divestment of Canada. Aegon has earmarked the CAD 600 million proceeds of this divestment to redeem the USD 500 million 4.625% senior bond, due in December 2015. Excess capital in the holding increased to EUR 1.8 billion. Dividends of EUR 0.5 billion paid to the holding by the United States, resulting from the divestments of Canada and Clark Consulting, were partly offset by the payment of the 2015 interim dividend, interest payments and operating expenses.

Aegon's Insurance Group Directive (IGD) solvency ratio increased to 225% in the third quarter as a result of divestments, earnings generated in the quarter and one-time adjustments. The capital in excess of the S&P AA threshold in the United States declined to USD 0.6 billion, due to negative market impacts on hedges and one-time items resulting from the assumption changes and model updates. In the Netherlands, the IGD ratio, excluding Aegon Bank, moved up significantly to ~250%, driven mainly by a higher valuation of mortgages in the general account. The Pillar I ratio in the United Kingdom, including the with-profit fund, increased to ~140%, due to earnings generated in the quarter and positive market impacts.

Cash flows

Operational free cash flows excluding market impacts and one-time items amounted to EUR 350 million in the third quarter of 2015. The charges from one-time items of EUR 243 million were primarily related to the assumption changes and model updates. Positive market impacts amounted to EUR 131 million as a higher valuation of mortgages in the general account in the Netherlands more than offset hedging losses on variable annuities in the United States. Operational free cash flows including market impacts and one-time items amounted to EUR 238 million for the quarter.