Q4 2016 Results | AEX:AGN | NYSE:AEG
Strong improvement in underlying earnings driven by the Americas
- Underlying earnings up to EUR 554 million driven by strong expense management, improved claims experience and higher interest rates
- Expense savings reached an annual run rate of EUR 110 million, significantly exceeding the 2016 target
- Fair value items result of EUR (13) million as gains in the Netherlands from widening credit spreads and higher interest rates were offset by losses in the United States as a result of market volatility
- Net income of EUR 470 million driven by strong underlying earnings and one-time tax benefits
- Return on equity increases to 10.5%, and 9.1% excluding one-time tax benefits
Continued solid gross deposits; net outflows mostly from lower margin businesses
- Gross deposits of EUR 23 billion; net outflows of EUR 3.5 billion driven by outflows from Chinese money market funds and anticipated lapses on Mercer block
- New life sales amount to EUR 240 million partly driven by shift to fee-based solutions in NL
- Accident & health and general insurance sales down 5% to EUR 225 million following product exits in US
- Market consistent value of new business of EUR 118 million benefiting from higher interest rates
Solvency II ratio benefits from market movements
- Solvency II ratio increases to an estimated 159% driven by favorable spread movements and higher interest rates
- Capital generation of EUR 0.3 billion, excluding market impacts and one-time items of EUR 0.3 billion
- Review of current 75% level of loss absorbing capacity of deferred taxes to be completed before the end of the second quarter of 2017
- Holding excess capital increases to EUR 1.5 billion and gross leverage ratio to 29.9% as a result of senior debt issuance
- Final 2016 dividend per share of EUR 0.13
“During 2016, we made good progress in the execution of our strategy by growing our business, realizing major expense savings and increasing our returns.
"At the same time, we continued to invest in our digital transformation and enhance the customer experience.
“I am especially pleased that we concluded the year with strong fourth quarter earnings, which increased as a result of successful expense reductions, improved claims experience and growth in fee-based revenues.
“Our group capital position remained stable throughout the year despite significant volatility in financial markets, political uncertainty and regulatory changes.
"In line with our target to return capital to shareholders, we are today announcing a final dividend of 13 cents per share.
"Looking ahead, I am confident that the actions we are taking as a management team will enable us to deliver on our promises to all stakeholders.”
All comparisons are against the fourth quarter of 2015, unless stated otherwise.
- Strategy update and financial targets reaffirmed at December investor conference
- Bancassurance partnership with Santander in Spain & Portugal extended
- Cofunds acquisition closed; making Aegon the leading UK platform
- Transamerica Ventures invests in German pension start-up fairr.de
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.
In December 2016, Aegon provided the market with a strategy and progress update on the 2018 financial targets at its Analyst & Investor Conference in New York City. This included a number of significant measures tied to the previously announced 5-part plan to improve operational performance in the Americas, such as:
- Doubling the expense savings to be achieved from USD 150 million to USD 300 million by 2018
- Further net reduction of >500 roles
- First phase of location strategy implemented, resulting in the closure of 3 locations
- Strategic decision to close Affinity, Direct TV and Direct Mail channels resulting in USD 100 million of capital release over the next three years
- Development of integrated Worksite offering to combine wealth, health & advice
With the planned operational performance improvements in the Americas, Aegon reaffirmed the company’s target of a group return on equity of 10% by 2018. The target will further be supported by a Group-wide expense savings program of EUR 350 million by 2018 and by returning EUR 2.1 billion of capital to shareholders in the period 2016 to 2018.
On December 28, 2016, Aegon and Banco Santander agreed to extend the scope of their bancassurance partnership in Spain by including health insurance. The joint venture partners have also agreed to accelerate the commercial development of certain insurance products in the coming months. Furthermore, Aegon and Banco Santander Totta agreed to strengthen their commitment through a more ambitious business plan in Portugal by expanding the distribution reach of their partnership. These agreements build on the successful development of the bancassurance partnership in Spain and Portugal in recent years.
On January 1, 2017, Aegon successfully closed the acquisition of Cofunds from Legal & General following regulatory approval. Cofunds and Aegon’s platform businesses are highly complementary. With the transaction Aegon will have an additional 750,000 platform customers representing approximately GBP 75 billion assets under administration, bringing total customers to over 1 million on Aegon’s platforms with more than GBP 100 billion assets under administration. The acquisition is expected to yield significant synergies from distribution, cost and capital perspectives.
Effective January 1, 2017, Management Board member Marco Keim was given expanded responsibilities which now include oversight of the Netherlands, Central & Eastern Europe, and Spain & Portugal. In this expanded role he will focus his efforts on realizing significant revenue synergies through cross-border collaborations such as Aegon’s Digital Center of Excellence. This will help Aegon adapt to fast moving changes in the industry by sharing knowledge and expertise on a variety of topics, including technology, control functions, human resources, multinational product offerings and digital solutions.
Transamerica Ventures, Aegon’s venture capital fund made an investment in German pension start-up fairr.de, which is a digital pension provider with a direct sales model. Fairr.de has demonstrated rapid growth in Germany and presents an opportunity for Aegon’s Dutch pension business to enter the market. Fairr.de offers third pillar private pension plans for employers, independent professions and the self-employed, while also offering corporate pension products to employers. Aegon’s Dutch pension business is expected to contribute significant value to the partnership through its broad experience in the fields of corporate pension products, primarily company pension plans.
In the United States, Aegon’s subsidiary Transamerica launched a new customer care cross-training program called the Learning Journey. Consistent with the company’s strategic shift to One Transamerica, the program is reshaping the customer experience by cross-training call center representatives to handle and process questions on multiple product lines. This is a significant step in improving the customer experience as it will reduce the need to transfer customers from one representative to another depending on product type. Instead the training will allow for a single representative to serve the customers’ needs, while developing a deeper and more meaningful relationship.
In November, Aegon the Netherlands surpassed more than 900,000 My Aegon accounts, which is an increase of more than 150,000 accounts in 2016. My Aegon is a website and mobile app that allows Aegon customers to have insights into their financial positions day and night. My Aegon provides customers with access to the necessary documentation digitally and at a moment’s notice when and where they want it, reducing the need for physical mailings. Over 37% of all Aegon the Netherland’s customers currently have a My Aegon account and have completed more than 130,000 transactions in 2016 contributing to the improved Net Promoter Scores seen throughout the year.
For the second year in a row, Transamerica has achieved 90 out of 100 possible points in the Human Rights Campaign Foundation Corporate Equality Index. Businesses are scored on a range of policies that support LGBTQ employees, these include anti-discrimination protections, domestic partner benefits, diversity training and transgender-inclusive benefits. Transamerica’s continued high score reflects the company’s commitment to creating an inclusive work environment for all employees. Workplace equality continues to grow in importance to customers when choosing how their financial needs will be met and this ranking solidifies Transamerica is at the forefront of this evolution.
Aegon the Netherlands improved 10 spots to number 15 in the 2016 Best Employer Survey for companies with more than 1,000 employees. There were more than 200,000 employees across more than 300 organizations surveyed to derive the best employers to work for in the Netherlands. Aegon scored high on organizational pride, receiving praise for work, satisfaction with alignment of the organization and satisfaction with the type of work performed. Aegon’s ambition is to further improve as an employer of choice and to enter the top 10 of the Best Employer Survey in the Netherlands.
Underlying earnings before tax
Aegon’s underlying earnings before tax in the fourth quarter of 2016 increased by 27% compared with the fourth quarter of 2015 to EUR 554 million. This increase was in part driven by expense reductions, an improvement in claims experience in the United States and positive adjustments to intangible assets related to higher interest rates. Favorable claims experience and one-time items totaled EUR 38 million in the fourth quarter of 2016.
Underlying earnings from the Americas increased to EUR 388 million as a result of EUR 31 million favorable morbidity experience and a positive adjustment to intangible assets from higher interest rates of EUR 18 million. These more than offset EUR 13 million adverse persistency in the life business and EUR 5 million one-time charges. Expense savings as a result of management actions offset an increase in variable expenses and the acquisition of Mercer’s defined contribution business.
In Europe, underlying earnings increased to EUR 174 million. This was mainly 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. Earnings in the United Kingdom also benefited from increased fee income as well as EUR 8 million favorable claims experience and reserve releases, which more than offset margin pressure. Earnings from the other businesses in Europe were stable compared with the same quarter last year.
The result of Aegon’s operations in Asia increased to EUR 13 million as a result of a positive impact of EUR 7 million from higher interest rates.
Underlying earnings from Aegon Asset Management declined slightly to EUR 35 million, mainly as a result of lower performance fees.
The result from the holding declined to a loss of EUR 57 million driven by EUR 8 million one-time charges from reserve adjustments and higher project-related expenses. The latter included expenses related to the implementation of a new global HR system.
Net income amounted to EUR 470 million as a result of strong underlying earnings and a favorable effective tax rate.
Fair value items
The loss from fair value items amounted to EUR 13 million. Gains in the Netherlands from positive real estate revaluations, widening credit spreads, and an interest rate mismatch on an IFRS basis were more than offset by losses in the United States. The latter was mostly driven by fair value items without an accounting match as a result of higher equity markets and interest rates following the US elections.
Realized gains on investments
Realized gains on investments of EUR 36 million were mostly the result of private equity divestments and normal trading activity in the Netherlands.
Net impairments amounted to EUR 1 million, as recoveries on energy-related bonds in the United States were offset by an impairment in asset management.
Other charges of EUR 38 million were mainly driven by the United States, which primarily related to restructuring charges. In Europe, other charges were driven by an adjustment of deferred policyholder acquisition costs related to Aegon’s European variable annuities business and additions to a legal claims provision in Central & Eastern Europe (CEE), which were partly offset by model updates in the Netherlands.
The result from run-off businesses decreased to a loss of EUR 1 million due to a EUR (18) million adjustment to the intangible balances for the BOLI/COLI business.
Income tax amounted to EUR 66 million in the fourth quarter as a result of one-time tax benefits in the United States and the United Kingdom. The effective tax rate for the quarter was 12% as a result.
Return on equity
Return on equity increased to 10.5% in the fourth quarter of 2016 driven by higher underlying earnings and the aforementioned tax benefits. Excluding these tax benefits Aegon’s return on equity would have amounted to 9.1%.
Operating expenses decreased by 2% compared with the fourth quarter of 2015 to EUR 978 million. Expense reductions as a result of management actions, lower restructuring charges, favorable currency movements, and non recurrence of last year’s defined benefit charges more than offset an increase in year end variable personnel expenses and the acquisition of Mercer’s defined contribution business.
Aegon’s total sales declined by 6% to EUR 2.7 billion in the fourth quarter of 2016. This was mainly the result of lower gross deposits which were down 5% as a result of a decrease in asset management deposits from last year’s exceptionally high level. Lower deposits from asset management more than offset increased deposits from Aegon’s online bank Knab and higher retirement plan deposits in the United States. Net outflows amounted to EUR 3.5 billion and were mainly driven by outflows from low-margin money market funds in China and 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 12% to EUR 240 million, partly driven by lower pension sales in the Netherlands as a result of a continued shift in demand from defined benefit to defined contribution solutions. In addition, universal life sales in the United States continue to be impacted by a decline in the recruitment of new agents. Furthermore, new premium production for accident & health and general insurance was down by 5% to EUR 225 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 118 million compared with the fourth quarter of 2015 due to a lower contribution from variable annuities in the United States as well as the divestment of the annuity portfolio and a change in product mix in the United Kingdom. As a result of higher interest rates, market consistent value of new business increased considerably compared with previous quarters in 2016.
Revenue-generating investments were up 3% during the fourth quarter of 2016 to EUR 743 billion as the appreciation of the US dollar and higher equity markets more than offset net outflows and the impact of higher interest rates on the value of fixed income investments.
Shareholders’ equity was stable compared with the end of the previous quarter at EUR 21 billion on December 31, 2016. Retained earnings, positive remeasurements of defined benefit plans and strengthening of the US dollar largely offset a lower revaluation reserve as a result of increased interest rates. Shareholders’ equity, excluding revaluation reserves and defined benefit plan remeasurements, increased 7% to EUR 17.5 billion – or EUR 8.52 per common share – at the end of the fourth quarter. The main drivers of this increase were net income and favorable currency movements.
The gross leverage ratio increased 40 basis points to 29.9% in the fourth quarter, as the issuance of senior debt more than offsets the positive impact of this quarter’s net income. On December 6, 2016, Aegon issued EUR 500 million senior unsecured notes with a coupon of 1%. The proceeds of these notes have been earmarked for the redemption of EUR 500 million 3% senior unsecured notes due in July 2017. Pro forma for this redemption, Aegon’s gross financial leverage ratio reduced to 28.4%.
Holding excess capital increased to EUR 1.5 billion driven by the aforementioned issuance of senior notes. Excluding this item, holding excess capital decreased by EUR 0.1 billion to EUR 1.0 billion, as EUR 0.2 billon remittances from the units were offset by neutralization of the 2016 interim stock dividend, coupon payments and operating expenses.
Capital generation of the operating units excluding market impacts and one-time items amounted to EUR 0.3 billion in the fourth quarter of 2016. Market impacts in the quarter amounted to EUR 0.4 billion, mainly due to the positive impact of favorable credit spread movements on the Dutch mortgage portfolio and favorable market movements on the own employee pension plans in Aegon’s main markets. One-time items totaled EUR (0.1) billion, and included higher capital requirements mainly as a result of a repositioning of Aegon the Netherlands’ investment portfolio. Capital generation including market impacts and one time items amounted to EUR 0.6 billion for the quarter.
Aegon’s Solvency II ratio increased to an estimated 159% during the fourth quarter as favorable market impacts more than offset one-time items in the operating units and the net effect from other items. Before the end of the second quarter of 2017, the assumptions underlying Aegon’s factor for the loss absorbing capacity of deferred taxes (LAC-DT) of 75% will be reviewed following new guidance by the Dutch Central Bank issued early February 2017. The Dutch operating entities have remitted EUR 100 million to the local holding in the first quarter of 2017. Upstreaming of dividend from Aegon the Netherlands to the group is pending the aforementioned review.
The estimated local solvency ratios of Aegon’s main units as of December 31, 2016 were:
- 440% RBC ratio in the United States
- 141% Solvency II ratio in the Netherlands
- 156% Solvency II ratio in the United Kingdom
On February 10, 2017, Standard & Poor’s affirmed its ‘AA-’ ratings on Aegon’s core operating entities, while revising their outlook on Aegon and its rated subsidiaries domiciled in the United States and the Netherlands from ‘stable’ to ‘negative’.
At the Annual General Meeting of Shareholders on May 19, 2017, the Supervisory Board will, absent unforeseen circumstances, propose a final dividend for 2016 of EUR 0.13 per common share. If approved, and in combination with the interim dividend of EUR 0.13 per share paid over the first half of 2016, Aegon’s total dividend over 2016 will amount to EUR 0.26 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’s Euronext-listed shares will be quoted ex-dividend on May 23, 2017, while its NYSE-listed shares will be quoted ex-dividend on May 22, 2017. The record date for both shares is May 24, 2017. The election period for shareholders will run from May 30 up to and including June 16, 2017. The stock fraction will be based on the average share price on Euronext Amsterdam from June 12 until June 16, 2017. The stock dividend ratio will be announced on June 20, 2017, and the dividend will be payable as of June 23, 2017.