Q1 2016 Results | AEX:AGN | NYSE:AEG
Underlying earnings before tax impacted by lower average equity markets
- Underlying earnings increase to EUR 462 million, as higher earnings from Europe more than offset lower earnings from the Americas due to one-time items and lower average equity markets during the quarter
- Net income down to EUR 143 million, as performance of alternative assets and hedges drive fair value losses of EUR 358 million
- Return on equity of 7.3%
Continued strong sales from fee-based deposit businesses
- Sustained strong US retirement plan and asset management sales lead to EUR 30 billion gross deposits; net deposits of EUR 7.8 billion
- New life insurance sales down 11% to EUR 266 million driven by lower sales in Asia and Poland
- Accident & health and general insurance sales down 15% to EUR 286 million, mainly due to US
- Market consistent value of new business decreases to EUR 133 million due to lower life sales and interest rates
Capital position reflects return of capital to shareholders and market impacts
- Solvency II ratio declines to ~155% on a pro forma basis, as capital generation and the UK annuity reinsurance transaction were offset by adverse market impacts, the deduction of the 2015 final dividend and the share buyback
- Capital generation of the operating units excluding market impacts and one-time items of EUR 0.3 billion
- Cash buffer at the holding of EUR 1.0 billion and gross leverage ratio of 28.7%
- Association Aegon to participate for EUR 58 million in EUR 400 million share buyback
CEO Alex Wynaendt's full statement
"Aegon's underlying earnings and net income for the first quarter were impacted by volatile financial markets, which also had an impact on our capital position.
"Our Solvency II ratio remains well within our target range, and also reflects the impact of the full share buyback and anticipated pay-out of the final dividend.
"I am pleased that we continue to make significant progress on achieving our strategic objectives.
"This quarter, we announced both the divestment of two-thirds of our UK annuity book and the acquisition of BlackRock's platform-based defined contribution business.
"These transactions enable us to fully focus on our fast-growing platform and serve the growing needs of our more than two million customers in the UK.
"By transforming our businesses we aim to become a more cost-effective organization, while continuing to grow and diversify our customer base across all our markets.
"This is leading to very strong deposits, especially in our fee-based retirement plan and asset management businesses."
All comparisons in this release are against the reported first quarter of 2015, unless stated otherwise.
- Two thirds of UK annuity portfolio sold to Rothesay Life
- Acquisition of BlackRock's UK DC platform and administration business
- Transamerica launches new variable annuity investment options
- AIFMC named best fund management company at Chinese Golden Bull Fund Awards
Aegon's ambition is to be a trusted partner for financial solutions at every stage of life, and to be recognized by its customers, business partners and society as a company that puts the interests of its customers first in everything it does.
In addition, Aegon wants to be regarded by its employees as an employer of choice, engaging and enabling them to succeed. This ambition is supported by four strategic objectives embedded in all Aegon businesses: Optimized portfolio, Operational excellence, Customer loyalty, and Empowered employees.
On April 11, Aegon announced the sale of two thirds of its UK annuity portfolio to Rothesay Life. Aegon initially reinsured GBP 6 billion of liabilities to Rothesay Life, which will be followed by a Part VII transfer.
This transaction is an important step in the process to fully divest the UK annuity portfolio, and follows the earlier announcement that the UK annuity portfolio is no longer strategically core to Aegon.
By selling the majority of the UK annuity portfolio, Aegon will be able to fully focus on its fast-growing platform. The platform enables workplace savers and consumers to build up savings during their working lives, and then manage an income in retirement with the support of a financial advisor or directly online.
In line with Aegon's strategy to focus on its pension and protection customers, Aegon recently announced the acquisition of BlackRock's Defined Contribution (DC) pension and administration platform business, subject to court approval.
The strength of Aegon's workplace pension offering in the SME market, in which BlackRock's DC platform and administration business specializes, will be supplemented by access to large plan, trust-based and investment-only markets.
This acquisition will further improve the scale and competitive position of Aegon's pension business in the United Kingdom, as well as strengthen Aegon's already fast-growing platform proposition.
In the Netherlands, Aegon announced a strategic partnership with mobile innovation specialist MOBGEN. MOBGEN develops innovative mobile systems and applications for multinational companies, better enabling them to connect digitally with their customers.
This long-term strategic partnership will allow Aegon to take advantage of MOBGEN's extensive knowledge and experience, and supports Aegon's ambition to accelerate its digital transformation. In addition, the partnership provides MOBGEN with access to Aegon's financial expertise.
In the US, Transamerica announced three new variable annuity investment options with underlying portfolios that invest across a series of BlackRock's iShares smart beta exchange-traded funds.
Smart beta investment strategies track non-traditional and fundamentally constructed indices and aim to take advantage of systematic biases or inefficiencies in the market, thereby helping investors reduce risk, generate income and enhance returns.
Offering these new options is part of Aegon's commitment to providing a broad range of investment solutions for financial advisors and customers.
Just one year after its launch, Aegon's joint venture – Asia's only impartial unbiased metasearch engine for insurance and financial products – recorded 50% month-on-month growth in usage, and today has served more than 1.2 million users in total.
Aegon expanded its global retirement research network with the launch of the Instituto de Longevidade Mongeral Aegon in Brazil.
Backed by Mongeral Aegon, Aegon's joint venture in Brazil, the Instituto de Longevidade was established in response to a particularly urgent need in Brazil. As a result of the increase in life expectancy and falling birth rate, Brazilians aged 50 and over will soon represent an even higher proportion of the population than in most other countries.
The main objective of the institute is to create awareness about longevity and retirement in Brazil by providing research and solutions, and by engaging with the different stakeholders. The work of the new institute complements that of the Aegon Center for Longevity and Retirement, and the Transamerica Center for Retirement Studies.
At the Chinese Golden Bull Fund Awards, Aegon's Shanghai-based Chinese joint venture, Aegon Industrial Fund Management Company (AIFMC), received six awards, including the Golden Bull Award for being a Top Ten Fund Management Company. In total, more than 100 fund management companies and 2,000 funds took part.
Over the last nine years, AIFMC has been a seven-time winner of the Golden Bull Award for being a Top Ten Fund Management Company. AIFMC is not only widely recognized as an equity investment leader, but also for fixed income and money market investments. It is known for its consistent strategy of being focused on long-term return and stable growth.
Underlining Aegon's capabilities as a customer-centric organization, Aegon's joint venture in India, Aegon Life, was awarded the 'Best Service Quality Program' at the Indian Service Quality Awards 2016.
This award recognizes Aegon Life's work to adopt quality management principles. The Indian Service Quality Awards promote quality services and give a special recognition to organizations that contribute significantly on this front.
Aegon launched the Global Aegon Awards, an initiative to celebrate achievements and share excellence across the organization.
Six of the categories that employees could be nominated for highlighted Aegon's strategic focus: Best community engagement, Best empower initiative, Best improvement, Most customer-centric team, Best employee in support and staff, and Best employee in customer service.
The awards were a great success and provided an opportunity for employees to come together to share best practices, learn from one another's experiences and build international relationships. These opportunities will contribute to Aegon becoming a truly digital and customer-centric company.
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 2016 increased 7% compared with the first quarter of 2015 to EUR 462 million. Underlying earnings included adverse one-time items of EUR 25 million in the first quarter of 2016. Lower account balances due to lower average equity markets during the quarter had an impact of EUR 14 million on underlying earnings in the Americas.
Underlying earnings from the Americas declined by 2% to EUR 283 million, mainly because of the recurring impact of the actuarial assumption changes and model updates announced and implemented in the third quarter of 2015 and lower fee income from lower average equity markets during the quarter.
In Europe, underlying earnings increased by 20% to EUR 169 million. This was driven by lower amortization of deferred policy acquisition costs (DPAC) in the United Kingdom as a result of the write down of deferred policy acquisition costs related to upgrading customers to the retirement platform in the fourth quarter of 2015, and the normalization of surrenders in Poland.
The result from Aegon's operations in Asia improved to nil, mainly driven by growth of the High Net Worth (HNW) businesses and improved mortality results.
Asset Management underlying earnings remained at a high level of EUR 45 million, as higher performance fees in China and the acquisition of a minority stake in La Banque Postale Asset Management were offset by higher expenses related to growth of the business.
Total holding costs declined to EUR 36 million, primarily due to lower funding costs after the redemption of a senior bond in December 2015.
Net income declined to EUR 143 million, caused by higher losses from fair value items and lower realized gains.
Fair value items
The loss from fair value items was EUR 358 million. This was mainly driven by underperformance of alternative investments in the United States, the macro equity hedge program due to hedge mismatches and the impact of the mismatch between IFRS accounting and the Solvency II framework on Aegon's interest rate hedges in the Netherlands.
Realized gains on investments
Realized gains on investments amounted to EUR 54 million and were mainly the result of real estate divestments in the United States and normal trading activity.
Impairments were EUR 36 million for the quarter and primarily related to investments in the energy industry in the United States.
Other charges amounted to EUR 6 million.
Earnings from run-off businesses improved to EUR 28 million, driven by favorable mortality claims.
Income tax amounted to EUR 1 million in the first quarter, driven by tax exempt income, the positive impact of tax credits and certain losses being taxed at a higher rate than the group as a whole. The effective tax rate on underlying earnings was 24%.
Return on equity
Return on equity increased to 7.3% in the first quarter of 2016, driven by higher net underlying earnings and lower shareholders' equity as a result of the write down of deferred policy acquisition costs in the United Kingdom related to upgrading customers to the retirement platform in the fourth quarter of 2015.
In the first quarter, operating expenses increased by 6% to EUR 960 million, driven by higher expenses related to growth of the business in Asset Management, the Mercer and La Banque Postale acquisitions and one-time employee expenses in the United States. Excluding the impact of these acquisitions, operating expenses increased by 4%, mainly caused by currency movements, one-time expenses in the Americas and investments to support the growth of the business in Asia and Asset Management.
Aegon's total sales increased by 36% to EUR 3.6 billion in the first quarter of 2016. This increase was mainly the result of higher gross deposits in Retirement Plans and Asset Management. The former was mainly driven by the Mercer acquisition, while the latter was related to higher recognized gross deposits in AIFMC and the acquisition of a minority stake in La Banque Postale Asset Management.
Gross deposits increased by 51% to EUR 30.1 billion, primarily for the reasons mentioned above. Excluding these, gross deposits increased 7%, as higher deposits in Retirement Plans and in Knab in the Netherlands more than offset a lower contribution from variable annuities.
Net deposits, excluding run-off businesses, increased to EUR 7.9 billion due to the Mercer acquisition.
New life sales were down 11% to EUR 266 million, as higher indexed universal life sales in the United States were more than offset by lower HNW sales in Asia and a decline of unit-linked sales in Poland.
New premium production for accident & health and general insurance declined to EUR 286 million, driven by the impact of lower portfolio takeovers and product re-pricing in the United States.
Market consistent value of new business
The market consistent value of new business amounted to EUR 133 million. The positive effect of a favorable product mix in life insurance in the United States was more than offset by the negative impact of lower interest rates on sales and margins in Asia and the United States, and a change in the product mix for pensions in the Netherlands.
Revenue-generating investments slightly declined during the first quarter of 2016 to EUR 705 billion, as net inflows were more than offset by adverse currency movements.
Shareholders' equity increased by EUR 0.2 billion compared with the end of the previous quarter to EUR 22.8 billion on March 31, 2016. Revaluation reserves increased by EUR 1.3 billion to EUR 7.8 billion. Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, declined to EUR 16.9 billion – or EUR 8.13 per common share – at the end of the first quarter, as adverse currency movements and the impact of the share buyback more than offset earnings generated in the quarter.
The gross leverage ratio increased to 28.7% in the first quarter, primarily due to the EUR 0.2 billion cost of the first tranche of the share buyback completed in the first quarter. The cash buffer in the holding declined to EUR 1.0 billion as a result of the share buyback, capital contributions to operating units of EUR 0.1 billion, interest payments and holding operating expenses.
Aegon's Solvency II ratio declined to ~155% on a pro forma basis in the first quarter, which includes the benefit of the reinsurance of two thirds of the annuity portfolio in the United Kingdom, excluding the Part VII transfer. This decline was mainly driven by taking into account the full EUR 400 million share buyback that is in progress, the deduction of the final dividend over 2015, and adverse market impacts.
The RBC ratio in the United States increased to ~480%, driven by earnings generated in the quarter and the benefit of declining interest rates on variable annuity hedges.
In the Netherlands, the Solvency II ratio declined to ~135%, driven by widening mortgage spreads, credit ratings migration, and the impact of lower interest rates.
In the United Kingdom, the Solvency II ratio at ~140% on a pro forma basis of the reinsurance transaction excluding the Part VII transfer, was also negatively impacted by lower interest rates and adverse credit spread movements.
Capital generation of the operating units, amounted to EUR (0.6) billion in the first quarter of 2016. Market impacts in the quarter include the effects of widening credit spreads, credit ratings migration and lower interest rates. Excluding market impacts of EUR (0.7) billion and one-time items of EUR (0.2) billion, capital generation amounted to EUR 0.3 billion for the quarter.
On April 6, the United States Department of Labor (DOL) issued the final version of its new Fiduciary Rule, which will change the regulation around retirement products and will come into full effect as of January 1, 2018. Aegon anticipates the Fiduciary Rule to have a short-term negative impact on variable annuity sales of approximately 10%-20%, in line with industry expectations. In addition, the extended transition period allowed under this rule will also enable Aegon to avoid major disruption. Most important, there is no impact on the variable annuity back book.
Aegon is committed to complying with the various requirements of this rule, and within the prescribed timeframe. Aegon is focused on ensuring organizational readiness for this rule, including developing a variety of solutions that enable Aegon to address the needs of its customers and distribution partners in a post-Rule environment. Aegon's business is helping people achieve a lifetime of financial security, and it remains confident in its ability to continue to do so.
On January 13, 2016, Aegon announced and commenced its EUR 400 million share buyback program. The first tranche of EUR 200 million was completed on March 31, 2016 through the repurchase of 41.1 million shares. The second tranche of EUR 200 million was announced and started on April 1, 2016. As of May XX, 2016, XX million shares have been repurchased at an average repurchase price of EUR X.XX per share.
Vereniging Aegon (Association Aegon) will participate in the share buyback program and sell EUR 58 million of its Aegon shares in an off-market transaction with the company in order to maintain its current level of voting rights. This transaction will be executed on May 19, 2016. The shares will be sold by Association Aegon at the volume-weighted average price between May 13 and May 19, 2016. The transaction will be an integral part of the second tranche.