Q3 2016 Results | AEX:AGN | NYSE:AEG
Solid earnings supported by expense savings – limited impact from assumption changes and model updates
- Underlying earnings of EUR 461 million*; realized expense savings and favorable equity markets were more than offset by the effects of adverse US mortality experience and lower interest rates
- Limited net impact from assumption changes and model updates of EUR (81) million; all reported in other charges*
- Net income of EUR 358 million; gains from fair value items offset by other charges
- Return on equity increases to 7.7%
Sales growth driven by fee-businesses – strong gross deposits of EUR 25 billion
- Gross deposits increase by 19% to EUR 25 billion mainly from US retirement plans and asset management. Net outflows of EUR 2.5 billion as a result of anticipated contract discontinuances in business acquired from Mercer
- New life sales decline by 15% to EUR 219 million resulting from lower universal life sales and strict pricing policy
- Accident & health and general insurance sales down by 5% to EUR 218 million, mainly due to product exits in US
- Market consistent value of new business decreases to EUR 70 million due to lower interest rates and VA sales
All capital metrics continue to be within target ranges
- Solvency II ratio declined slightly during the third quarter to an estimated 156% as a result of adverse market impacts; immaterial impact on group ratio from assumption changes and model updates
- Capital generation of EUR 0.3 billion excluding market impacts and one-time items of EUR (0.2) billion
- Holding excess capital stable at EUR 1.1 billion as remittances from the units offset dividends to shareholders
- Gross leverage ratio improves to 29.5% driven by retained earnings
CEO Alex Wynaendt's full statement
"Throughout the third quarter, we further executed on our key strategic objectives by successfully reducing our costs, maintaining our strong capital position and growing our profitable fee-based businesses.
"At the same time, we continue to invest in new technologies to support our increased interaction with customers, and in innovative products to address their growing needs.
"Aegon's Solvency II ratio remains strong and our management actions enabled us to mitigate adverse market impacts.
"While our annual assumption changes and model updates had a limited impact on earnings, there was no impact on our capital position or capital generation going forward.
"Earnings from our US life insurance business continued to be volatile as a result of higher than expected claims.
"We are particularly pleased by gross deposits of EUR 25 billion during the quarter.
"In the US, the integration of Mercer's defined contribution retirement plan administration business is on track. We did experience outflows following the acquisition of this business, as anticipated.
"All-in-all, we are making continued progress to deliver on our strategic priorities aimed at positioning Aegon to achieve growth and deliver value to all our stakeholders."
* As of Q3 2016 the results from assumption updates will be reported as part of 'Other income/(charges)'. Previously, these impacts were reflected in underlying earnings or fair value items. The comparative numbers have been updated to reflect this change.
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 September 22, Aegon entered into an agreement to sell 100% of its shares of Aegon Life Ukraine to TAS Group, and will exit the Ukrainian market. The deal is subject to customary closing conditions, including regulatory approvals. The transaction is expected to be completed by January 2017.
With the aim to further capture growth opportunities in Brazil, Mongeral Aegon and BANCOOB (Banco Cooperativo do Brasil) received regulatory approval in August 2016 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 almost 4 million associates and 2,200 points of service.
BANCOOB is a private commercial bank owned by the credit cooperative entities affiliated with the SICOOB system. The joint venture represents a further expansion into bank distribution for Mongeral Aegon, which already serves over 2.5 million customers nationwide through over 4,000 broker partners.
Aegon in conjunction with Allianz, Munich Re, Swiss Re and Zurich launched the Blockchain Insurance Industry Initiative, B3i. The initiative aims to explore the potential of distributed ledger technologies to better serve clients through faster, more convenient and secure services.
If Blockchain technology proves viable, it could streamline paper work and reconciliations for (re-)insurance contracts and accelerate information and money flows, while at the same time greatly improving auditability.
The initiative, which is open to other insurers and reinsurers, is a pilot project that aims to achieve a proof-of-concept for inter-group retrocessions by the use of Blockchain technology.
The founding members aim to develop standards and processes for industry-wide usage, and to facilitate the transition from individual company use cases to viable solutions across the entire insurance value chain.
Aegon maintained its leading position in the Dow Jones Sustainability Index, with a score of 82 out of 100, compared with an industry average of 50. The index tracks the performance of the leading large companies worldwide on a variety of categories including governance, remuneration, compliance, environmental footprint and transparent reporting. Aegon again proved itself to be one of the leading companies in its sector in terms of sustainability, remaining in the top 10 percent of the financial services industry.
Aegon scored particularly well on its commitments to the Principles for Sustainable Insurance, Risk management, and Tax Policies and Practices. Aegon's new Global Tax Policy and Principles of Conduct contributed to an increase of 14 percentage points in the Tax Strategy category.
Transamerica announced a new partnership with Mercer on October 5 for Mercer's employer clients. Mercer developed a solution for its employer clients that enables them to transfer fiduciary responsibility. The company did, however, need a partner to sell its new solution because Mercer sold its recordkeeping business to Transamerica in 2015. The new arrangement ensures that every plan for which Transamerica assumes fiduciary responsibility will have relatively the same design and pricing structure to minimize customization.
This innovative approach makes the products more efficient and learnings from this new agreement can be applied to products Transamerica offers directly to employers itself. The first plans are expected to convert on January 1, 2017.
On September 19, Transamerica launched the HigherEd Retirement ConsortiumSM, a new multiple employer retirement plan designed to help private colleges and universities merge their employee retirement plans.
The new solution assists employers by simplifying plan administration, managing fiduciary responsibilities, taking advantage of expert plan management, and receiving economies of scale in administrative and investment pricing. The plan also offers an open architecture investment platform with no proprietary fund requirements.
Aegon's global 'Future Fit' strategy is empowering Aegon employees to be fit for the new digital, connected and data driven world. Key areas of focus include enabling employees through providing the infrastructure, tools and training needed to exceed customers' expectations.
Furthermore, initiatives such as the Digital Accelerator Program in Aegon UK and Aegon Hungary, and the Global Aegon Analytical Academy, an annual traineeship for employees to enhance data analytical capabilities across the company, illustrate how digital capabilities and expertise are being improved across the company.
Aegon's Digital Center of Excellence held its first ever Hackathon, a 24 hour pop-up initiative that provided 36 Aegon employees from Europe and Asia an opportunity to work together and collaborate on innovate new digital initiatives.
The event enabled Aegon's employees to think and act like they were working for a technology start-up company, by allowing them to freely conceptualize, design and pitch prototypes of their ideas to investors for funding. At the conclusion of the event, eight viable digital and data-driven initiatives were identified for further development and potential implementation within various business units.
Actuarial and economic assumption changes and model updates
Aegon reviews its actuarial and economic assumptions annually in the third quarter. In addition, as part of an ongoing commitment to deliver operational excellence, the company reviews and refines its models where necessary. These assumption changes and model updates on balance accounted for charges of EUR 81 million in the third quarter of 2016.
As of this quarter, actuarial and economic assumption changes and model updates are all included in other income / (charges). These items were previously reported across underlying earnings, fair value items and other income / (charges). Presenting the impacts from assumption changes and model updates in one place improves transparency of Aegon's results. The comparative numbers have been updated to reflect this change.
Underlying earnings before tax
Aegon's underlying earnings before tax in the third quarter of 2016 declined by 7% compared with the third quarter of 2015 to EUR 461 million.
Expense savings and favorable market impacts were more than offset by adverse claims experience in the United States and negative adjustments to intangible assets related to lower than anticipated reinvestment yields. Adverse claims experience and lower than anticipated reinvestment yields in the third quarter of 2016 amounted to EUR 13 million and EUR 23 million, respectively.
Underlying earnings from the Americas declined to EUR 307 million. This was caused by adverse mortality experience and the negative adjustment to intangible assets related to lower than anticipated reinvestment yields, which more than offset the effects of favorable morbidity experience, favorable equity markets, and reduced expenses. The latter was driven by the benefit from management actions leading to expense savings.
In Europe, underlying earnings increased to EUR 151 million. This increase was driven by lower amortization of deferred policy acquisition costs (DPAC) in the United Kingdom following the write down of DPAC related to upgrading customers to the retirement platform in the fourth quarter of 2015.
The result from Aegon's operations in Asia was down to EUR 6 million, as favorable mortality was more than offset by the negative impact from lower than anticipated investment yields.
Underlying earnings from Aegon Asset Management declined to EUR 32 million, mainly as a result of increased expenses due to continued investments in the growth strategy in addition to lower management fees and unfavorable currency movements.
The result from the holding improved to a loss of EUR 35 million, resulting from lower funding costs after the redemption of a senior bond in December 2015.
Net income amounted to EUR 358 million. Other charges as a result of assumption changes and model updates were more than offset by gains from fair value items.
Fair value items
The result from fair value items totaled EUR 84 million. This was mainly driven by credit spread tightening and favorable investment returns in the United States and positive real estate revaluations in the Netherlands.
Realized gains on investments
Realized gains on investments decreased to EUR 21 million. Gains on the sale of assets related to the divestment of the annuity book in the United Kingdom and normal trading activity more than offset losses in the Americas.
Net recoveries of EUR 6 million for the quarter were the result of net recoveries in the Americas which more than offset impairments on the consumer loan portfolio in the Netherlands.
Other charges amounted to EUR 72 million as a result of the net impact of assumption changes, model updates and other items. A charge of EUR 81 million has been recorded in other charges in respect of assumption changes and model updates. The impact is mainly attributable to Aegon's businesses in the US. Assumption changes and model updates in the US from long-term care led to a net negative impact of EUR 100 million. These were the result of experience updates including morbidity, termination rates and utilization assumptions. For the other business lines in the US, assumption changes and model updates largely offset each other. The main items were the refinement of modelling of crediting rates on indexed universal life policies and management actions, which together offset lower lapse assumptions on certain secondary guarantee universal life insurance blocks. Furthermore, model updates in the guarantee provision resulted in a benefit of EUR 28 million in the Netherlands.
Earnings from run-off businesses declined to EUR 8 million due to unfavorable mortality experience in the payout annuities block and a lower result in the reinsurance line of business.
Income tax amounted to EUR 152 million in the third quarter, which is in line with the average nominal tax rate for the group. The effective tax rate on underlying earnings was 24%.
Return on equity
Return on equity increased to 7.7% in the third quarter of 2016, as lower net underlying earnings were more than offset by lower shareholders' equity as a result of capital returned to shareholders and the write down of DPAC related to upgrading customers to the UK retirement platform in the fourth quarter of 2015.
Operating expenses decreased by 1% compared with the third quarter of 2015 to EUR 900 million. Lower operating expenses in the Americas resulted from expense savings, and lower sales-related and other variable operating expenses. This was partly offset by the acquisition of Mercer's defined contribution business in the United States, expenses related to the acquisitions of Cofunds and BlackRock's defined contribution business in the United Kingdom, and higher Solvency II-related expenses and investments in new business initiatives in the Netherlands.
Aegon's total sales increased by 13% to EUR 2.9 billion in the third quarter of 2016. This increase was the result of higher gross deposits, which were up 19% to EUR 24.7 billion.
Retirement Plans deposits increased due to the inclusion of deposits in the business acquired from Mercer, in addition to higher takeover and recurring deposits.
Asset Management deposits increased mainly due to higher recognized gross deposits in Aegon's Chinese asset management joint venture in addition to higher inflows in the Netherlands and in the Americas.
Net outflows amounted to EUR 2.5 billion and were mainly driven by net outflows on the business acquired from Mercer. The latter is in line with the anticipated lapse behavior when acquiring a block of retirement business.
New life sales declined by 15% to EUR 219 million, mainly driven by Aegon's adherence to its strict pricing policy in the current low interest rate environment. In addition, universal life sales were impacted by new sales force training programs, which led to a decline in the recruitment of new agents. In the longer term these programs should have a favorable impact on sales.
New premium production for accident & health and general insurance was down by 5% to EUR 218 million due to product exits in the United States.
Market consistent value of new business
The market consistent value of new business declined to EUR 70 million. This was mainly due to the negative impact from lower interest rates and lower variable annuity sales following the product adjustments implemented last year.
Revenue-generating investments were up 1% during the third quarter of 2016 to EUR 723 billion, as net outflows were more than offset by favorable market movements.
Shareholders' equity declined by EUR 0.8 billion compared with the end of the previous quarter to EUR 21.1 billion on September 30, 2016, mainly as a result of lower revaluation reserves. Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, increased to EUR 16.3 billion – or EUR 7.84 per common share – at the end of the third quarter. Net income for the quarter more than offset the payment of the 2016 interim dividend. The gross leverage ratio improved to 29.5% in the third quarter, driven by retained earnings.
Holding excess capital remained stable at EUR 1.1 billion as net remittances from the units and a tax benefit offset dividends paid to shareholders and holding operating expenses.
Capital generation of the operating units excluding market impacts and one-time items amounted to EUR 0.3 billion in the third quarter of 2016. Market impacts in the quarter amounted to EUR (0.3) billion, mainly due to the effects of lower interest rates and credit spreads on Aegon's own employee pension plan provisions in the United Kingdom and the Netherlands, and a lower benefit from the volatility adjuster.
One-time items amounted to EUR 0.2 billion, which were driven by management actions in the Netherlands and implementation of a XXX reserve financing solution with an external reinsurer.
Assumption changes and model updates had an immaterial impact on the capital generation, as the benefits from assumption changes and model updates in the United States and updated longevity assumptions in the United Kingdom were offset by the implementation of updated longevity assumptions in the Netherlands.
Capital generation including market impacts and one time items amounted to EUR 0.1 billion for the quarter.
Aegon's Solvency II ratio decreased slightly to an estimated 156% in the third quarter as adverse market impacts and the interim 2016 dividend more than offset management actions and capital generation.