Q4 2014 Results: Aegon reports higher earnings and sales

Proposal to increase final dividend to EUR 0.12 per share.

Q4 2014 Results | AEX:AGN | NYSE:AEG

Continued solid business performance

• Underlying earnings increase to EUR 562 million, driven by growth of the business (EUR 37 million), an employee benefit release in the Netherlands (EUR 45 million) and the stronger US dollar (EUR 25 million)
• Hedging programs and alternative investments main drivers of fair value items loss of EUR 132 million
• Net income up strongly to EUR 399 million, supported by higher realized gains on investments
• Return on equity of 9.7% and 10.5% excluding capital allocated to run-off businesses

Key markets deliver strong sales growth; asset base continues to expand

• Gross deposits up 29% to EUR 13.7 billion, driven by asset management, variable annuities, mutual funds and Knab; net deposits of EUR 2.4 billion (excluding stable value products)
• Life sales increase 9% to EUR 523 million, mainly as a result of higher universal life sales in US and Asia
• Accident & health and general insurance sales 14% higher to EUR 226 million, driven by US
• Profitability of sales remains strong with MCVNB of EUR 196 million despite lower interest rates

Gross leverage and fixed charge cover targets achieved after debt redemption

• Gross leverage ratio improves to 28.7% and fixed charge cover increases to 6.5x
• Solvency ratio at 208%; holding excess capital of EUR 1.25 billion after debt redemption
• Operational free cash flows excluding market impacts and one-time items of EUR 338 million

Statement of Alex Wynaendts, CEO

"Aegon's strong fourth quarter results complete a solid year for the company, in what continues to be a challenging environment with persistent low interest rates and market volatility. Higher sales and earnings this quarter evidence the strength of our franchise and the continued trust of our customers.

"Executing on our key strategic objective of optimizing our portfolio of businesses, we announced the sale of our Canadian operations, as well as our stake in La Mondiale Participations in France. At the same time, we continue to invest in growth opportunities. Recently, we announced an asset management partnership with La Banque Postale in France, and we are pleased to conclude a distribution agreement with BANCOOB in Brazil.

"Aegon is well-positioned to serve the diverse and growing financial needs of our current and future customers. Moreover, we remain committed to generating long-term value for all stakeholders. I am therefore pleased that our solid capital position and cash flows enable us to announce an increase in the final dividend to 12 euro cents per share."

Strategic Highlights

• Sale of minority interest in La Mondiale Participations for EUR 350 million
• Aegon and La Banque Postale form asset management partnership in France
• Global employee engagement survey shows Aegon's leading position in the sector

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 is committed to continually assessing its businesses to ensure they contribute to its strategic objectives. This resulted in the announcement of the divestment of its Canadian activities in October 2014 and, after a comprehensive strategic review, the announcement of an agreement to sell its 35% share in La Mondiale Participations to La Mondiale for EUR 350 million in November 2014. This is in line with book value and the transaction is expected to close in the first quarter of 2015.

Recognizing opportunities in the market, Aegon and La Banque Postale announce that they have concluded an agreement to form a strategic long-term asset management partnership in France. As part of the agreement, Aegon will acquire a 25% stake in La Banque Postale Asset Management (LBPAM) for a consideration of EUR 112.5 million with the option to increase the stake to 35%. LBPAM is the fifth largest asset manager in France with approximately EUR 150 billion assets under management. The two companies will work closely together to develop a range of investment products that La Banque Postale Asset Management will offer to La Banque Postale's 11 million clients and to its growing institutional client base in France. The transaction is expected to close mid-2015 subject to regulatory approval.

With the aim to further capture growth prospects in Brazil, Mongeral Aegon and BANCOOB (Banco Cooperativo do Brasil) signed an agreement to establish a joint venture to provide life insurance and pension solutions within the SICOOB System. SICOOB is the largest cooperative financial system in the country, with over 2.8 million associates and 2,200 points of service. BANCOOB is a private commercial bank that is owned by the credit cooperative entities affiliated with the SICOOB system. In 2014, the bank had approximately EUR 7 billion in assets and a net equity of approximately EUR 250 million. This agreement represents a key expansion into bank distribution for Mongeral Aegon which already serves over 1 million customers nationwide through over 4,000 broker partners. The final agreement is subject to regulatory approval by SUSEP (Superintendência de Seguros Privados) and CADE (Conselho Administrativo de Defesa Econômica).

Deliver operational excellence

Mongeral Aegon was the winner of the 2014 Innovation in Insurance Award, in the Products and Services category. The National Confederation of Insurance Companies in Brazil recognized Mongeral Aegon's new digital distribution strategy which integrates traditional distribution channels with the company's own online portal and with online stores from business partners.

Aegon has successfully completed the merger and rebranding of a number of legal entities in the United States. Aegon insurance companies in the United States now almost exclusively operate under the Transamerica brand. This simplifies the legal structure, reduces costs, releases capital and leverages the strength of Aegon's Transamerica brand among customers and intermediaries.

Enhance customer loyalty

Aegon has started to upgrade customers in the United Kingdom onto its award-winning platform, Aegon Retirement Choices. This is an important step in the development of the platform. Customers experience better service, lower fees and are able to take advantage of a number of retirement readiness tools offered exclusively on the platform. Upgraded customers are choosing to consolidate assets from other sources.

Knab, Aegon's online bank in the Netherlands,has been recognized as having the best new investment concept for its simple, convenient and accessible investing. It provides sample portfolios to help guide newer investors as well as advanced analysis tools for more experienced investors. Knab's innovations have now attracted more than 50,000 customers, following a strong increase in 2014.

Aegon Spain has expanded its multi-channel distribution approach by rolling out a new innovative advice channel offering customers a personal protection and retirement planning service. Aegon advisers guide customers through their options and use the latest technology to simplify financial and protection planning. Two customer centers have opened in Barcelona and Madrid with others planned over the coming years.

Aegon Hungary was the recipient of three awards for its damage prevention campaign, a European Excellence Award, CSR Hungary Award and PR Society Award. These prestigious accolades acknowledge the best sustainability initiatives in Hungary. Aegon Hungary was also recognized, for the sixth consecutive year, for excellence in customer service by winning the Hungarian Association of Independent Insurance Brokers best insurer award for outstanding customer service in the residential property and personal insurance categories.

Empower Employees

Results from Aegon's fourth annual global employee survey place Aegon at or above the high-performing norm for the financial services sector. Employee empowerment and enablement have each increased 4 points alone this year, and 10 points since the first survey in 2011, to 73 and 74 respectively. 88% of all Aegon employees worldwide participated in the survey. This demonstrates the success of Aegon's ongoing work to become the most preferred employer in the sector, which allows Aegon to attract and develop the talent required to best service the needs of its customers.

Operational Highlights

Financial overview and Revenue-generating investments... (Page 3).

Underlying earnings before tax
Aegon's underlying earnings before tax in the fourth quarter of 2014 increased 19% to EUR 562 million compared with the fourth quarter of 2013. The main drivers of the increase were higher earnings resulting from growth in variable annuity, pension and asset management balances (EUR 37 million), an employee benefit reserve release resulting from legislation changes in the Netherlands (EUR 45 million) and the stronger US dollar (EUR 25 million). These more than offset the reduction in earnings of approximately EUR 25 million, which resulted from the assumption changes and model updates implemented in the third quarter.

Underlying earnings from the Americas were up 23% to EUR 367 million. Growth in variable annuity and pension balances, the positive impact of one-time items of EUR 15 million and favorable currency movements, were partly offset by the earnings reduction from the assumption changes and model updates implemented in the third quarter.

In the Netherlands, underlying earnings increased 39% to EUR 172 million. This was driven by a positive contribution of EUR 45 million from an employee benefit reserve release.

Underlying earnings from Aegon's operations in the United Kingdom were up 45% to EUR 29 million in the fourth quarter of 2014, mainly due to improved persistency.

Underlying earnings from New Markets declined to EUR 33 million. Higher surrenders in Poland following product changes (EUR 10 million), the derecognition of the earnings contribution from France and lower earnings from Asia more than offset growth at Aegon Asset Management, which resulted from an increase in third-party business.

Total holding costs increased to EUR 39 million. This was primarily the result of net interest costs following a debt issuance to refinance a perpetual bond in the second quarter of 2014, of which the cost was previously accounted for directly through shareholders' equity. In addition, higher Solvency II related expenses and the non-recurrence of a gain from interest on taxes of EUR 18 million in the fourth quarter of 2013 also had a negative impact.

Net income
Net income more than doubled to EUR 399 million due to higher underlying earnings, an improvement in fair value items and higher realized gains on investments, more than offsetting an increase in other charges.

Fair value items
The results from fair value items improved to a loss of EUR 132 million. The loss was mainly driven by hedging programs and underperformance on alternative investments related to the energy sector in the United States, and credit spread tightening in the Netherlands. These were partly offset by a change in discounting resulting from a change in collateral agreements for derivative portfolios, together with a positive result on the hedges covering guarantees in the Netherlands.

Realized gains on investments
Realized gains on investments increased to EUR 304 million, and were primarily related to a repositioning of the investment portfolio in anticipation of Solvency II in the Netherlands and the United Kingdom, and the divestment of a private equity investment in the Netherlands.

Impairment charges

Impairments increased to EUR 28 million. This was mainly the result of lower recoveries on previously impaired structured securities, which supported impairments in the previous quarters of 2014. Aegon expects this trend to continue into 2015.

Other charges
Other charges totaled EUR 191 million and were primarily caused by a charge for the Optas agreement in the Netherlands (EUR 95 million), a provision for the implementation of the fee cap on pensions in the United Kingdom (EUR 35 million), a provision for the modification of unit-linked policies in Poland (EUR 23 million) and a change in the valuation of fixed assets in Aegon's Canadian business in anticipation of its divestment (EUR 15 million).

Run-off businesses
The loss from run-off businesses amounted to EUR 3 million.

Income tax
Income tax amounted to EUR 112 million in the fourth quarter. The effective tax rate on underlying earnings was 24%.

Return on equity
Return on equity increased to 9.7% for the fourth quarter of 2014, driven by higher underlying earnings. Return on equity for Aegon's ongoing businesses, excluding the run-off businesses, amounted to 10.5% over the same period.

Operating expenses
In the fourth quarter, operating expenses increased 7% to EUR 897 million, due to a stronger US dollar and a provision for the implementation of the fee cap on pensions in the United Kingdom, which more than offset an employee benefit reserve release in the Netherlands. At constant currencies, the increase was 3%.

Sales
In the fourth quarter of 2014, Aegon's total sales were up 22% to EUR 2.1 billion. This was the result of growth in variable annuities, indexed universal life and universal life with secondary guarantees, as well as favorable currency effects. New life sales were up 9% to EUR 523 million, driven by higher sales of universal life products in the United States and Asia. In response to the further decline of interest rates and in-line with Aegon's pricing discipline, Aegon stopped offering its universal life product with secondary guarantees in early February 2015. Gross deposits increased 29%, as higher deposits in Aegon Asset Management and variable annuities in the United States more than offset lower deposits in the retirement business. Net deposits, excluding run-off and stable value businesses amounted to EUR 2.6 billion as a result of inflows in variable annuities, the retirement business and Aegon Asset Management. New premium production for accident and health insurance increased 13% to EUR 204 million, mainly due to higher supplemental health sales in the United States as a result of the Affordable Care Act.

Market consistent value of new business
The market consistent value of new business amounted to EUR 196 million. The positive effect of sales growth in the United States was more than offset by lower interest rates and lower production of Dutch mortgages for Aegon's general account. The universal life product with secondary guarantees, which Aegon has decided to stop selling in February 2015, had a negative market consistent value of new business in the fourth quarter.

Revenue-generating investments
Revenue-generating investments increased 4% during the fourth quarter of 2014 to EUR 558 billion, driven by favorable market impacts, currency movements and net inflows.

Capital management
Shareholders' equity increased EUR 2.4 billion compared with the end of the third quarter of 2014 to EUR 24.3 billion at December 31, 2014. This increase was mainly driven by lower interest rates, which resulted in higher revaluation reserves, and favorable currency movements. The revaluation reserves were up by EUR 1.8 billion to EUR 8.3 billion. Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, increased to EUR 17.6 billion – or EUR 8.34 per common share – at the end of the fourth quarter, driven by net income generated during the quarter and favorable currency movements.

The gross leverage ratio further improved to 28.7% in the fourth quarter, well within the target range of 26-30%. This was driven by the redemption of the EUR 500 million 4.125% senior bond as of December 8, 2014, and higher shareholders' equity. The fixed charge cover ratio increased to 6.5x in 2014, up from 5.2x in 2013 and within the target range of 6-8x. Excess capital in the holding company amounted to EUR 1.2 billion, as the impact of debt redemption, interest payments and operating expenses were only partly offset by net dividends received from country units.

Aegon's Insurance Group Directive (IGD) ratio increased to 208% in the fourth quarter of 2014, mainly driven by earnings generated in the quarter. The capital in excess of the S&P AA threshold in the United States remained stable at USD 1.1 billion, as dividends paid to the holding were offset by earnings. The RBC ratio in the United States was ~540% at year-end 2014. In the Netherlands, the IGD ratio, excluding Aegon Bank, was ~215%. Earnings generated in the fourth quarter were more than offset by the negative impact of declining interest rates on required capital. The Pillar I ratio in the United Kingdom, including the with-profit fund, was ~140%, as the negative impact of de-risking and business transformation costs more than offset earnings generated during the quarter. These local Solvency I ratios will become less relevant over the course of 2015, as Aegon's capital management for its European entities transitions towards Solvency II, ahead of its introduction as of January 1, 2016.

On November 24, 2014, Aegon announced that it had reached an agreement to sell its 35% share in La Mondiale Participations to La Mondiale for EUR 350 million, in line with IFRS book value. The proceeds will increase the group's IGD solvency ratio by approximately 5 percentage points. Aegon expects this transaction to close in the first quarter of 2015.

Cash flows
Operational free cash flows were EUR 325 million in the fourth quarter of 2014. Excluding one-time items and positive market impacts operational free cash flows amounted to EUR 338 million. Positive market impacts in the Americas were largely offset by negative market impacts in the Netherlands and the United Kingdom.

Final dividend
At the Annual General Meeting of Shareholders on May 20, 2015, the Supervisory Board will, absent unforeseen circumstances, propose a final dividend for 2014 of EUR 0.12 per common share. If approved, and in combination with the interim dividend of EUR 0.11 per share paid over the first half of 2014, Aegon's total dividend over 2014 will amount to EUR 0.23 per common share. The final 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 intends to neutralize the dilutive effect of the stock dividend on earnings per share.

Aegon's Euronext-listed shares will be quoted ex-dividend on May 22, 2015, while its NYSE-listed shares will be quoted ex-dividend on May 21, 2015. The record date is May 25, 2015, for Aegon's Euronext-listed shares and May 26, 2015, for its NYSE-listed shares. The election period for shareholders will run from May 28 up to and including June 12, 2015. The stock fraction will be based on the average share price on Euronext Amsterdam from June 8 through June 12, 2015. The stock dividend ratio will be announced on June 17, 2015 and the dividend will be payable as of June 19, 2015.