Aegon maintains solid capital ratio despite volatile markets in Q2 2016

Q2 2016 Results | AEX:AGN | NYSE:AEG

Underlying earnings impacted by adverse claims experience; net loss driven by UK annuity book divestment

  • Underlying earnings amount to EUR 435 million; higher earnings from Europe more than offset by the Americas mainly due to adverse claims experience, low interest rates and lower variable annuity earnings
  • Fair value items loss of EUR 378 million, mostly driven by the impact of low interest rates on hedging programs
  • Net loss of EUR 385 million due to book loss on divestment of UK annuity book and fair value items
  • Return on equity of 6.8%

Continued strong sales from deposit businesses; decline in life sales reflects continued focus on profitability

  • Gross deposits at high level of EUR 23 billion driven by US retirement plans, asset management and savings deposits in the Netherlands; net deposits, excluding run-off businesses, of EUR 1.2 billion
  • New life sales decline 11% to EUR 244 million as a result of focus on profitability
  • Accident & health and general insurance sales down 9% to EUR 226 million, mainly from lower production in US
  • Market consistent value of new business decreases to EUR 100 million due to lower life sales and interest rates

Capital position remains solid as a result of management actions; interim dividend increased by 8%

  • Solvency II ratio increased to an estimated 158%, as capital generation and management actions, including UK annuity book divestment, offset adverse market impacts
  • Capital generation of EUR 0.9 billion; EUR 0.3 billion excluding market impacts and one-time items
  • Holding excess capital up to EUR 1.1 billion as net dividends received from the units more than offset capital return to shareholders and holding expenses
  • Gross leverage ratio increases to 29.6% driven by capital return to shareholders and net loss
  • Interim dividend increases 8% to EUR 0.13 per share; intention to neutralize dilutive effect of stock dividend

CEO Alex Wynaendt's full statement

"While I am pleased with the development of our capital position, our second quarter results did not meet our expectations.

"Earnings were affected by exceptionally low interest rates, adverse claims experience in our life and health businesses in the US, and the book loss from the divestment of our UK annuity portfolio.

"We are implementing further measures to improve earnings going forward – including accelerating our ambitious expense savings program currently under way across our company.

"Management actions during the second quarter resulted in an improvement to Aegon's capital position. These led to a substantial benefit in the Netherlands and included divesting our annuity portfolio in the UK, which was clearly in the best strategic and financial interests of our company.

"We are pleased by the strong gross deposits, an indication that we are successfully repositioning our businesses and providing attractive solutions to an expanding customer base. Moreover, the acquisition of BlackRock's Defined Contribution platform and today's announcement of the acquisition of Cofunds positions our UK business as the leader in the fast growing digital platform market.

"Reflecting the continued strength of our balance sheet and our commitment to provide attractive returns to our shareholders, we are announcing an increase in our interim dividend to 13 cents per share." 

Aegon Q2 Results KPIs

All comparisons in this release are against the second quarter of 2016, unless stated otherwise. 

 Strategic Highlights

  • Aegon divests remaining part of own UK annuity portfolio to Legal & General
  • Aegon finalizes sale of certain assets of Transamerica Financial Advisors
  • Aegon first to receive license to launch General Pension Fund in the Netherlands
  • Kames achieves highest rating in UN Principles for Responsible Investment Survey
  • Transamerica earns award for being a top business technology innovator

Aegon's ambition
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.

Five part plan announced to improve returns in the Americas

Recent financial performance and deterioration in the macro environment, with interest rates falling to new lows have intensified headwinds. Therefore, despite the significant changes already underway, more must be done to cut costs and improve results. Aegon is committed to increasing return on equity and announces a five part plan for improved returns in the Americas.

1. Remediation of deterioration of profitability in life & health businesses

Aegon has taken decisive action to address the poor financial performance of the Life & Health businesses, and management will continue to identify further measures to improve returns:

Implementing increases on monthly deduction rates on three sizable blocks of Universal Life (UL) insurance.
Diligently working with regulators to secure rate increases on its Long Term Care (LTC) business.
These actions are expected to improve results starting 2016. In addition to steps already underway to improve the results of our UL and LTC blocks, Aegon is accelerating the assessment of additional blocks in order to identify further opportunities to improve returns.

2. Focused and disciplined expense management implementation

Aegon is committed to reducing operating expenses in the Americas by USD 150 million by 2018, and has a number of initiatives already underway and planned for 2017 and beyond.

Overall, total headcount for Transamerica has declined by 650 since the end of the first quarter.

Other examples include the One Recordkeeping system for retirement plans and the integration of the acquired Mercer business, and a move to digitized transactions and rationalization of printing. However, some projects may take longer to implement. To offset any delay in realized savings, further measures are being identified.

3. Rationalized location strategy in light of One Transamerica restructure

To better capture the intended benefits of the One Transamerica strategy, further promote operational excellence and fulfill the commitment to cost savings and simplification, the company's geographic footprint in the US is under evaluation. It is also the goal to utilize innovative technology solutions to ensure collaboration in a cost-effective manner.

4. Strategic overhaul of business lines and product offerings

The product management group is conducting a rigorous review of the product portfolio in the United States to test for financial performance and risk characteristics, as well as fit within the customer centric strategic vision.

The objective is to pivot from making many products available across multiple channels to a more focused and simpler to administer approach that will support cost efficiency and operational excellence while still meeting the needs of the customer with a competitive platform.

This will span a multi-year period, but will result in a product set that transforms Transamerica into a higher-returning company that is more innovative, competitive, and responsive to market and customer needs.

5. Disposition of non-core assets

Aegon has taken numerous actions in order to optimize the business portfolio in the US. This is demonstrated by the divestitures of Transamerica Canada, Clark Consulting, Inc. and certain assets of Transamerica Financial Advisors, Inc. in the last 18 months.

Multiple other closed blocks are being assessed to determine if a transaction would transfer risk and release capital. Aegon is also exploring the sale of non-core legal entities that would bring greater simplification and enhance returns.

Aegon has implemented an aggressive plan in the US to enhance earnings, increase returns, and manage costs. This diligent plan will further "right-size" the organization given the market realities of its core businesses.

The One Transamerica restructure was the first – and critical – step to transform the company into a more nimble competitor. By aligning meaningful expense management and surgical product and business portfolio management with a streamlined operating model, the tactical plan to deliver on the strategic vision is well under way.

An in-depth update of the five part plan will be provided at Aegon's Analysts & Investor Conference on December 8, 2016 in New York.

Optimized portfolio
On May 23, Aegon announced the divestment of the remainder of its own UK annuity portfolio to Legal & General. Aegon initially reinsured GBP 3 billion of liabilities to Legal & General, which will be followed by a Part VII transfer. This transaction follows the previously announced divestment of GBP 6 billion of its UK annuity portfolio to Rothesay Life. Aegon now has approximately GBP 1 billion annuity liabilities remaining through an inward reinsurance transaction. By selling its own UK annuity portfolio, Aegon will be able to fully focus on its fast-growing platform and protection business.

In the United States, Transamerica completed the sale of certain assets of Transamerica Financial Advisors, Inc. to John Hancock Financial Network, Inc, on May 13. Transamerica Financial Advisors is a full-service, independent broker-dealer and registered investment advisor with around 1,100 advisors and 90 employees.

Aegon was the first company to receive approval from the Dutch Central Bank to launch 'Stap', a General Pension Fund (APF) in the Netherlands. Stap is a pension pooling vehicle that enables separate financial administration for multiple pension plans from multiple employers. This vehicle enables smaller pension schemes to benefit from economies of scale and to comply with complex pension regulations, meaning that a greater percentage of the employees' pension premium is invested and that employers and participants can count on excellent service.

The fund is administered by TKP, an Aegon subsidiary responsible for administering the pensions of over 3 million customers in the Netherlands. Stap also allows individual schemes to benefit from the investment expertise normally only available to larger pension funds. The fiduciary investments for Stap will be carried out by TKP Investments, a subsidiary of Aegon Asset Management, which has around 23 billion euro of existing assets under management and advice. Stap starts with the acquisition of corporate clients and existing company pension funds in liquidation. Later this year, Stap will also be available for the SME market.

As part of Aegon's strategy to enhance its risk-return profile and to improve capital efficiency, Aegon completed a fourth longevity transaction in the Netherlands in June. The transaction builds on previous longevity deals and underlines Aegon's leadership in the Dutch pension market. The hedge, covering close to EUR 3 billion of underlying reserves, provides protection for a period of 50 years against longevity improvements.

Aegon Life, Aegon's Indian joint venture, is accelerating the execution of its strategy. As a result, it will restructure its activities and focus on the digital direct-to-consumer market, in which it has a leading position. As such, it will close its traditional commission-based agency channel and reduce its agency headcount by over 3,000.

Operational excellence
Kames Capital, Aegon's asset management business in the UK, received the highest possible rating in the United Nation's most recent Principles for Responsible Investment Survey. The survey covers categories such as the quality and disclosure of policies, setting objectives and strategies, governance and resources, collaborative activities, and commitment to promoting responsible investment among its clients and peers. Kames Capital has been a signatory of the Responsible Investment Survey since 2008 and this is the second consecutive year in which it has received the A+ rating, which is awarded to only 15% of signatories.

Transamerica, Aegon's US subsidiary, was named as a 2016 Elite 100 Company by InformationWeek. Transamerica was ranked number 33 in InformationWeek's 28th annual list of top business technology innovators for its Enterprise Marketing and Analytics Platform. The platform brings together data from numerous product lines and points of customer contact to provide a 360 degree view of customers, from first outreach to customer retention, covering the end-to-end customer journey. The project allows Transamerica to better predict customers' future needs, which in turn can lead to further innovations.

Customer loyalty
Knab, Aegon the Netherlands' online bank, surpassed over 100,000 customers for the very first time during the quarter, only four years since its launch. Knab provides customers with an innovative and comprehensive overview of their investments, debts and income, not just with Knab but also held at other banks. The growing customer base is driven by the excellent quality of products and services that Knab offers. This was confirmed once again in recent customer surveys, which indicate that over 90% of business customers and private customers are very satisfied with the service they receive. Indeed, more than a third of individual customers and over 40% of business customers would recommend Knab to family, friends and colleagues, the highest score for any bank in the Netherlands.

Empowered employees
Transamerica and Aegon Asset Management jointly launched 'Bravo!', a digital employee recognition program. This provides a quick and easy means to recognize and reward employees who work together, bring clarity and exceed expectations. Bravo! awards points to employees who live Aegon's core values, and these points can be redeemed for gift cards, merchandise items or charitable contributions to the charity of the employee's choosing. Aegon is committed to recognizing and rewarding those employees who make a real difference in the business and the lives of its customers.

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 second quarter of 2016 declined by 14% compared with the second quarter of 2015 to EUR 435 million. This was the result of lower variable annuity margins, lower asset management performance fees, adverse claims and the recurring earnings impact of the actuarial assumption changes and model updates implemented in the third quarter of 2015. In total, adverse claims experience and one-time items amounted to EUR 45 million in the second quarter of 2016.

Aegon started reaping the benefits of its EUR 200 million expense savings program in the second quarter of 2016, with expenses declining by 4% compared with the previous quarter. As such, Aegon is ahead on reaching the planned savings for 2016.

Underlying earnings from the Americas declined to EUR 270 million. This was caused by adverse claims experience, lower earnings from Variable Annuities and the recurring USD 25 million impact of the actuarial assumption changes and model updates implemented in the third quarter of 2015. Earnings from Variable Annuities declined as a result of the reduction of closed block variable annuity balances and declining margins due to lower interest rates.

In Europe, underlying earnings increased by 15% to EUR 160 million. This increase was driven by lower amortization of deferred policy acquisition costs (DPAC) in the United Kingdom following 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 was down slightly to EUR 1 million, as Aegon increased the stake in its strategic partnership in India from 26% to 49% in the fourth quarter of 2015. On a comparable basis, the result was up by EUR 1 million.

Underlying earnings from Aegon Asset Management declined to EUR 37 million, mainly as a result of lower performance fees and unfavorable currency movements.

The loss from the holding improved to EUR 33 million, primarily due to lower funding costs after the redemption of a senior bond in December 2015 and a reinsurance benefit of EUR 3 million.

Net income
The net loss amounted to EUR 385 million. This was primarily caused by the book loss on the annuity divestment in the United Kingdom and a higher loss from fair value items.

Fair value items
The loss from fair value items was EUR 378 million. This was mainly driven by underperformance of alternative investments, equity and interest rate volatility in the United States, and interest rate hedges in the Netherlands.

Realized gains on investments
Realized gains on investments increased to EUR 229 million and were primarily the result of a rebalancing of the remaining investment portfolio in the United Kingdom and gains resulting from asset-liability management adjustments in the Netherlands.

Impairment charges
Impairments were EUR 23 million for the quarter, mainly related to energy investments in the United States.

Other charges
Other charges amounted to EUR 636 million, the main driver for which was the book loss on the annuity divestment in the United Kingdom of EUR 628 million. This was only partly offset by the book gain of EUR 52 million on the divestment of certain assets of Transamerica Financial Advisors.

Run-off businesses
Earnings from run-off businesses improved to EUR 18 million.

Income tax
Income tax amounted to EUR 30 million in the second quarter, mainly the result of the loss on the divestment of the annuity book in the United Kingdom being taxed at a lower rate than the profit contribution from the other business units. The effective tax rate on underlying earnings was 28%.

Return on equity
Return on equity declined to 6.8% in the second quarter of 2016, as lower net underlying earnings more than offset lower shareholders' equity.

Operating expenses
In the second quarter, operating expenses were stable at EUR 926 million compared with the second quarter of 2015, but down 4% compared with the previous quarter. The former was the result of expense savings programs in the United States and a lower US dollar, which offset higher expenses in the Netherlands and the impact of the inclusion of the acquisitions of Mercer's defined contribution business and a stake in La Banque Postale Asset Management. Excluding the impact of these acquisitions, operating expenses declined by 2%, mainly caused by the expense savings in the United States.

Aegon's total sales increased by 18% to EUR 2.8 billion in the second quarter of 2016. This increase was the result of higher gross deposits, which were up 27% to EUR 23.0 billion.

Retirement Plans deposits increased mainly due to the Mercer acquisition, while Asset Management benefited from higher recognized gross deposits in Aegon's Chinese asset management joint venture AIFMC and the inclusion of deposits from the minority stake in La Banque Postale Asset Management.

Net deposits, excluding run-off businesses, were down to EUR 1.2 billion, due to higher contract discontinuances from the Mercer block and lower inflows in variable annuities.

New life sales declined by 11% to EUR 244 million, mainly driven by Aegon's adherence to its strict pricing policy in the current low interest rate environment. New premium production for accident & health and general insurance was down to EUR 226 million, as a lower contribution from portfolio acquisitions and the impact of product exits in the United States more than offset higher general insurance sales in Spain and Hungary.

Market consistent value of new business
The market consistent value of new business declined to EUR 100 million. This was mainly due to the negative impact of lower interest rates on both sales and margins in Asia and the United States, and the exclusion of the value of new business generated by Aegon Bank in the Netherlands as of 2016.

Revenue-generating investments
Revenue-generating investments were up 2% during the second quarter of 2016 to EUR 717 billion due to favorable market movements.

Capital management
Shareholders' equity declined by EUR 0.9 billion compared with the end of the previous quarter to EUR 22.0 billion on June 30, 2016. Revaluation reserves increased slightly by EUR 0.1 billion to EUR 7.9 billion, as the impact of lower interest rates was nearly offset by the annuity divestment in the United Kingdom.

Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, declined to EUR 16.4 billion – or EUR 7.91 per common share – at the end of the second quarter. This was caused by the loss incurred in the quarter, the payment of the final dividend of 2015 and the second tranche of the share buyback.

The gross leverage ratio increased to 29.6% in the second quarter, primarily due to the book loss on the annuity divestment, the EUR 0.2 billion cost of the second tranche of the share buyback completed in the second quarter and the payment of the final 2015 dividend.

Holding excess capital increased by EUR 0.1 billion to EUR 1.1 billion as dividends received from the Americas, Asset Management, Spain and Central & Eastern Europe more than offset the impact of the second tranche of the share buyback, the final 2015 cash dividend, interest payments and holding operating expenses.

Aegon's Solvency II ratio increased to an estimated 158% in the second quarter. This was mainly the effect of management actions in the Netherlands and the annuity reinsurance transaction with Legal & General in the United Kingdom, which more than offset the negative impact of lower interest rates.

The RBC ratio in the United States declined to ~450%, driven by dividends paid to the holding and the negative impact of lower interest rates, which more than offset earnings generated in the quarter.

In the Netherlands, the Solvency II ratio increased to 154%, as the positive impact of a more thorough application of the volatility adjuster and tightening of sovereign spreads far exceeded the adverse impact of lower interest rates. In the United Kingdom, the Solvency II ratio increased to 145%, as the benefits of the reinsurance transaction with Legal & General and additional interest rate hedging more than offset lower interest rates.

Going forward, Aegon will report business unit Solvency II ratios on a semi-annual basis. The consolidated estimated group Solvency II ratio will continue to be reported on a quarterly basis.

Capital generation
Capital generation of the operating units, amounted to EUR 0.9 billion in the second quarter of 2016. Market impacts in the quarter amounted to EUR (0.2) billion, mainly due to lower interest rates in the United States and the Netherlands.

One-time items amounted to EUR 0.8 billion, which were the result of management actions in the Netherlands and the United Kingdom. In the Netherlands, these primarily consisted of a more thorough application of the volatility adjuster, while the United Kingdom benefited from additional interest rate hedges.

Excluding market impacts and one-time items, capital generation amounted to EUR 0.3 billion for the quarter. Capital generation in the second quarter of 2016 did not include the benefit of the annuity reinsurance transaction in the United Kingdom, which was accounted for directly in the Solvency II ratio.

Interim dividend
Aegon aims to pay out a sustainable, growing dividend, in line with the growth of its cash flows. This policy is reflected in the 8% increase of the 2016 interim dividend to EUR 0.13 per common share. The interim 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 August 19, 2016, and its NYSE-listed shares will be quoted ex-dividend on August 18, 2016. The record date is August 22, 2016. The election period for shareholders will run from August 24 up to and including September 9, 2016. The stock fraction will be based on the average share price on Euronext Amsterdam from September 5 through September 9, 2016. The stock dividend ratio will be announced on September 14, 2016 and the dividend will be payable as of September 16, 2016.