Aegon reports strong first half 2018 results
1H 2018 Results | AEX:AGN | NYSE:AEG
Net income amounts to EUR 491 million supported by increase in underlying earnings
- Underlying earnings increase by 2% to EUR 1,064 million, or 10% on constant currencies driven by expense savings, a higher investment margin in the Netherlands, performance fees, and growth in Asia
- Realized losses on investments of EUR 67 million are driven by the sale of US treasuries as part of ongoing asset liability management
- Other charges of EUR 294 million, mostly due to a loss on the sale of Aegon Ireland and charges related to restructuring programs, which are expected to generate substantial expense savings
- Return on equity increases significantly to 9.2% as a result of higher underlying earnings and a lower corporate tax rate in the United States
Net deposits increase driven by asset management flows; accident & health sales impacted by product exits
- Net deposits improve to EUR 3.9 billion, mainly driven by higher asset management inflows and better retention in the UK business, which more than offset outflows in the US retirement plan business
- New life sales decline by 2% to EUR 422 million on a constant currency basis, partly driven by lower indexed universal life and term life sales in the US; Adverse currency movements impact sales by an additional 8%
- Accident & health and general insurance sales down 48% to EUR 274 million mostly as a result of previously announced strategic decision to exit travel and stop loss insurance in the United States
Strong capital position and growing capital generation allow for increase in interim dividend
- Solvency II ratio increases by 14%-points compared with year-end 2017 to 215%, driven by own funds growth; Solvency ratios main units remain well within or above target zones
- Capital generation of EUR 1,386 million, including favorable market impacts and one-time items of EUR 628 million
- Interim 2018 dividend increases to EUR 0.14 per share
- Holding excess cash increases to EUR 1.9 billion mostly driven by remittances from the units; EUR 700 million has been earmarked to reduce leverage in the second half of 2018
- Gross financial leverage ratio of 28.9% expected to reduce by ~200 basis points following planned deleveraging
"In the first half of 2018, Aegon delivered a strong performance, demonstrating operational excellence, commitment to growth and continued capital allocation discipline. Building on our track record of expense savings, we further improved efficiency by transferring more than 2,000 employees as part of our outsourcing agreement in the United States, and migrated more than 400,000 retail customers from Cofunds to our platform. These actions will enable us to significantly reduce expenses, drive profitability and enhance customer experience.
"I'm excited that new propositions across our company are resonating well with customers, and the potential this offers to drive future growth. In the United States, we launched our new Wealth + Health brand identity to raise awareness about the connection between physical and financial well-being. By raising awareness and by offering the right solutions, we have the potential to help millions of people better prepare for the future.
"Our balance sheet remains strong with a Solvency II ratio of 215%, a significant increase compared with the end of last year. Furthermore, I am pleased that our businesses in the Netherlands and United Kingdom remitted capital to the group, and that our financial strength has enabled us to increase our interim dividend to 14 cents per share. This progress, together with expense savings, gives me confidence that we will be able to meet our 2018 targets."
- Aegon Americas transfers over 2,000 employees to TCS, leading to significant expense savings
- Aegon the Netherlands acquires leading Dutch income protection service provider Robidus
- More than 400,000 retail Cofunds customers migrated to Aegon UK's leading platform
- Aegon Spain expects to significantly improve profitability following management actions and M&A
- New products and business models drive significant inflows at Aegon Asset Management
Aegon's purpose – to help people achieve a lifetime of financial security – forms the basis of the company's strategy. The central focus of the strategy is to further transform Aegon from a product-based to a customer needs-driven company. This means serving diverse and evolving needs across the customer life cycle; being a trusted partner for financial solutions that are relevant, simple, rewarding, and convenient; and developing long-term customer relationships by providing guidance and advice, and identifying additional financial security needs at every stage of customers' lives.
Aegon is focused on reducing complexity, eliminating duplication, improving accuracy and increasing automation in order to realize cost efficiencies, thereby enabling it to invest and become a more digitally enabled and customer-centric company. Furthermore, the company is focused on driving scale and establishing strong positions in its current markets, adhering to strict standards to ensure the efficient use of capital by all of its businesses. Four key strategic objectives that enable the company to execute its strategy are embedded in all of Aegon's businesses: Optimized portfolio, Operational excellence, Customer loyalty and Empowered employees.
Aegon announced on January 11, 2018, that Transamerica had entered into an agreement with Tata Consultancy Services (TCS) to transform the administration of its US insurance and annuity business lines. The partnership is a significant step forward in the execution of its strategy as it enables Transamerica to accelerate both the enhancement of its digital capabilities and the modernization of its platforms to service its customers across all insurance and annuities lines of its business. As part of the agreement, which is expected to lead to run-rate expense savings of USD 100 million over time, over 2,000 Transamerica employees transitioned to TCS on April 16, 2018. Related to these expense savings, Aegon recorded USD 119 million of transition and conversion expenses in Other charges in the first half of 2018.
Transamerica successfully launched its Wealth + Health brand identity in the first half of 2018. This new identity is focused on helping customers improve their overall well-being by encouraging them to manage both their wealth and health. The launch included a high-profile advertising campaign targeted at financial professionals to demonstrate Transamerica's commitment to Wealth + Health. Transamerica also launched a series of new product enhancements over the course of the first half of the year to further improve its competitive positioning. Product enhancements for variable annuities have resulted in a favorable change in sales momentum. On top of the variable annuity enhancements, additional improvements were made in July to strengthen the competitive position of two of the products riders on offer. Regarding life products, new enhancements to indexed universal life (IUL) were launched in late April and have been very well received.
In support of the stated strategic objective to reduce the amount of capital allocated to its run-off businesses, Aegon announced on August 7, 2018 its agreement to divest the last substantial block of its life reinsurance business to SCOR Global Life. This transaction covers business that Transamerica retained after it divested the vast majority of its reinsurance business to SCOR Global Life in 2011 and 2017. The transaction is expected to result in a pre-tax IFRS loss of approximately USD 105 million and a one-time benefit of approximately USD 50 million on Transamerica's capital position in the second half of 2018. The IFRS equity allocated to run-off businesses has declined by USD 1.3 billion since the end of 2015 driven by a series of divestments.
To expand its position in the income protection value chain, Aegon the Netherlands reached an agreement to acquire Robidus, a leading income protection service provider in the Netherlands, from Avedon Capital Partners. This transaction fits Aegon's strategic objective to grow its fee-based businesses. Aegon will acquire approximately 95% of the company with the remainder to be retained by Robidus' management team. Robidus will continue to operate on a standalone basis under its own brand name. Aegon will pay EUR 105 million for this acquisition from holding excess cash.
In the United Kingdom, Aegon's broad platform offering and omni-channel distribution strategy have established Aegon as the leading platform provider in the market. So far in 2018, Aegon has completed several major migrations totaling GBP 85 billion assets as part of the Cofunds integration. The migration of GBP 57 billion institutional assets was completed in March, followed by the migration of more than 400,000 retail customers and GBP 28 billion of assets to the Aegon platform in May. After the migration process, some advisors and customers have experienced operational and customer services issues. Aegon UK has taken several measures to solve these and recover service levels, which led to GBP 3 million additional expenses in June. Aegon expects to incur additional integration expenses in Other charges until the Cofunds integration has been completed. Migration of the assets related to the Nationwide business is the final milestone in respect of the Cofunds integration and is expected to be completed in the first half of 2019. The full integration of Cofunds will enable Aegon to realize the GBP 60 million targeted annualized expense savings compared with GBP 20 million achieved through the first half of 2018.
Another important milestone in the transformation of Aegon UK was the successful transfer of GBP 16 billion of assets from BlackRock's defined contribution business, which brought new and enhanced capabilities to Aegon as part of its workplace proposition. The Part VII transfer for this business was completed on July 1, 2018 and is expected to lead to an approximate 10%-points reduction of Aegon UK's Solvency II ratio in the second half of 2018 driven by an increase in required capital due to the additional assets under administration.
The UK platform business reached a record high of GBP 120 billion assets. This increase was driven by a net inflow of GBP 2.6 billion and the upgrade of GBP 1.5 billion in customer assets to the platform. Since the start of the program, GBP 12.5 billion of customer assets have been upgraded to the platform out of a cumulative target of approximately GBP 20 billion by year-end 2020.
On April 3, 2018, Aegon successfully completed the sale of Aegon Ireland plc to Athora Holding Ltd. This transaction is consistent with Aegon's strategic objective to optimize its portfolio of businesses. The divestment led to an improvement in Aegon's group solvency ratio of over 4%-points and a book loss of EUR 93 million in the first half of 2018.
Aegon focuses on profitable growth in Spain & Portugal, where it aims to grow mostly in protection products. A clear example of this strategy is the agreement Aegon signed to expand its successful partnership with Banco Santander in Spain. The expansion, which covers term life and selected lines of non-life insurance following Banco Santander's acquisition of the Banco Popular franchise in 2017, will give Aegon access to an additional client base of four million customers and is expected to lead to substantial growth going forward. Aegon will pay an upfront consideration of EUR 215 million, plus an additional amount of up to EUR 75 million to be paid after 5 years, depending on the performance of the partnership. The final terms (including closing and date of payment) of the transaction are subject to due diligence, regulatory approval, several other conditions and to the process of terminating the existing alliances of Banco Popular.
In addition, to improve the results of Aegon's own business in Spain, which is currently loss-making, the company initiated a significant restructuring program in the first half of 2018. Through rationalization of distribution, expense savings and more effective claims handling, Aegon expects to generate improved financial results in this business. The restructuring, in combination with the continued growth and expansion of the partnership with Banco Santander, is expected to enable Aegon's business in Spain & Portugal to improve its profitability significantly.
Aegon focuses on three fast-growing customer segments in Asia: High-Net-Worth (HNW) individuals, aging affluent customers, and ascending affluent customers. Universal life insurance, variable annuities, and protection products are core products in the region. These products are supplemented with direct-to-customer digital distribution platforms in markets in which Aegon does not have an insurance license.
Transamerica Life Bermuda (TLB), Aegon's HNW business, continues to expand geographically and is serving and writing business for high-net-worth individuals in a growing number of markets. While universal life products are the key product for TLB, the company has launched a retirement product to complement the product suite while also developing other product ideas to better serve a competitive HNW segment in Asia.
In China, Aegon's commitment to a protection led strategy and strength of their critical illness products have enabled the joint venture to grow sales during the first half of 2018 in a challenging life insurance market. One of the key drivers of Aegon's strong sales growth is its award-winning digital distribution platform Zeus. Zeus is being upgraded in the second half of 2018 to deliver even more customer services and product offerings by further leveraging artificial intelligence technologies and big data capabilities.
In India, Aegon's joint venture continues to drive the direct-to-consumer strategy and the regions digital transformation with simple and transparent protection led products. From a sum assured perspective, the company ranks 8th in India in the first half of 2018, further demonstrating Aegon's focus on a protection led strategy.
Growing external third-party assets is an important element of the growth strategy of Aegon Asset Management. The continued strong commercial momentum in the Netherlands was underlined by strong inflows into the Dutch Mortgage Funds, which grew to EUR 15 billion of assets under management in the first half of 2018. Furthermore, Stap, the Dutch APF initiated by Aegon, for which TKPI (a subsidiary of Aegon Asset Management) undertakes the fiduciary management, won a significant mandate of EUR 1.7 billion. At the end of the first half of 2018, total assets under management in Stap stood at EUR 4.6 billion, making it the single largest APF in the Netherlands.
During the first half of 2018, Aegon Asset Management made significant progress in moving toward a globally integrated operating model to strengthen its organizational set-up and support its growth ambitions. In order to create an integrated, multi-location commercial business that makes doing business with Aegon simpler and more efficient, Asset Management combined its European based sales teams under one leadership. The globally integrated model with one Europe and one US region will enable the creation of a global suite of relevant investment strategies that can be distributed via its various brands in all of its markets, accelerate growth of third party business, and enhance Aegon's ability to attract and serve clients.
Underlying earnings before tax
Aegon's underlying earnings before tax increased by 2% compared with the first half of 2017 to EUR 1,064 million. Earnings increased by 10% on a constant currency basis driven by expense savings, higher investment margin in the Netherlands, business growth in Asia and higher performance fees. In the first half of 2018, adverse mortality in the United States more than offset favorable underwriting results in Asia and the Netherlands.
Underlying earnings from the Americas decreased by 8% to EUR 602 million driven by the weakening of the US dollar. On a constant currency basis earnings were up by 3%, as expense savings more than offset adverse mortality. The current half year included EUR 55 million unfavorable mortality compared with EUR 34 million in the same period last year across the Life and Fixed Annuity businesses.
Underlying earnings before tax from Aegon's operations in Europe increased strongly by 14% to EUR 435 million. This was the result of growth in all regions, most notably in the Netherlands. Earnings growth was mostly driven by a higher investment margin from the shift to higher-yielding assets, lower funding costs and growth of the bank's balance sheet, and lower expenses. Furthermore, earnings from non-life benefited from EUR 22 million in provision releases related to the disability business.
Aegon's underlying earnings in Asia increased by 38% to EUR 31 million as a result of higher earnings across all business lines. The increase in earnings from the HNW businesses was the result of higher investment yields and favorable claims experience. The other business lines benefited from expense savings and business growth, particularly in China.
Underlying earnings from Aegon Asset Management increased by 19% to EUR 83 million as a result of a EUR 18 million increase in performance fees, mostly driven by Aegon's Chinese asset management joint venture.
The result from the holding remained stable at a loss of EUR 87 million, as expense savings offset temporary higher interest expenses due to refinancing activities.
Net income amounted to EUR 491 million in the first half of 2018, and reflects strong underlying earnings as well as realized losses on investments, restructuring and integration expenses, and a book loss on the sale of Aegon Ireland.
Fair value items
The loss from fair value items amounted to EUR 3 million. Positive real estate revaluations in the Netherlands were offset by losses in the Netherlands and the United States on hedges in place to protect Aegon's capital position.
Realized losses on investments
Realized losses on investments totaled EUR 67 million, as losses from the sale of US treasuries more than offset gains as a result of portfolio optimization in Europe, including EUR 20 million in the United Kingdom.
Net impairments amounted to nil and reflect the continued benign credit environment.
Other charges of EUR 294 million were mainly driven by a book loss on the sale of Aegon Ireland and restructuring expenses in the United Kingdom, Spain and United States.
In Europe, Other charges of EUR 179 million were partly driven by the EUR 93 million book loss on the sale of Aegon Ireland, which closed on April 3, 2018. Restructuring and integration expenses in the United Kingdom and Spain totaled EUR 59 million. In the United Kingdom, a reserve strengthening of EUR 49 million for the residual annuity book was driven by the aforementioned portfolio optimization, which led to EUR 20 million realized gains. These items were partly offset by a benefit of EUR 27 million from assumption changes and model updates.
In the United States, Other charges of EUR 88 million were largely the result of EUR 98 million transition and conversion charges related to the agreement with TCS to administer Aegon's US insurance and annuity business lines. During the first half of 2018, Transamerica conducted its annual assumption review, which resulted in a charge of EUR 32 million. The IFRS assumption review for Long Term Care resulted in no material charges. These items were partly compensated by a EUR 45 million gain related to last year's divestment of the majority of the run-off businesses to Wilton Re.
Other charges at the holding amounted to EUR 21 million and were driven by IFRS 9 / 17 implementation expenses.
The result from run-off businesses declined to a loss of EUR 7 million due to the divestment of the majority of the remainder of these businesses in 2017.
Income tax amounted to EUR 201 million, which implies an effective tax rate for the first half of 2018 of 29%, making it higher than the expected effective tax rate going forward. This was mainly the result of a one-time tax expense related to last year's divestment of the majority of the run-off businesses, which is offset by the aforementioned one-time gain. The effective tax rate on underlying earnings was 19% compared with 28% in the first half of 2017. This decrease reflects the lowering of the nominal corporate tax rate in the United States from 35% to 21%.
Return on equity
Return on equity increased by 120 basis points compared with the same period last year to 9.2%. The increase was driven by higher underlying earnings and a lower corporate tax rate in the United States.
Operating expenses decreased by 6% to EUR 1,863 million diven by the weakening of the US dollar. On a constant currency basis, expenses were stable, as expense savings, and the divestment of UMG and Aegon Ireland more than offset higher restructuring expenses. Aegon is on track to achieve EUR 350 million in annual run-rate expense savings by year end 2018 as part of its plans to improve return on equity. Initiatives to reduce expenses have led to annual run-rate expense savings of approximately EUR 325 million since the beginning of 2016, including the agreement with TCS. Annual run-rate expense savings increased by EUR 45 million in the first half of 2018.
Deposits and sales
Gross deposits increased by 8% to EUR 64 billion, as strong deposits in Asset Management more than offset adverse currency movements and lower deposits on the platform in the United Kingdom. Asset Management deposits benefited from continued strong inflows in the Dutch Mortgage Funds, fiduciary management inflows in the Netherlands related to general pension fund Stap, and strong inflows in China.
Net deposits amounted to EUR 3.9 billion, as continued strong asset management inflows and increased net inflows in the United Kingdom as a result of improved retention more than offset net outflows in the Americas driven by retirement plan outflows. These outflows were caused by a limited number of large contract losses in the 403(b) retirement business, which mostly related to medical care provider merger and acquisition activity. Excluding these outflows, net deposits in the US retirement business were neutral in the first half of 2018.
New life sales amounted to EUR 422 million, a decline of 10% as a result of the weakening of the US dollar. On a constant currency basis, new life sales declined by 2%. Lower term life and indexed universal life sales in the United States and lower sales in the Asian HNW businesses more than offset the continued success of the critical illness product in China, and higher sales in Spain & Portugal and the Netherlands.
New premium production for accident & health and general insurance decreased by 48% to EUR 274 million. This was predominantly driven by lower supplemental health, travel and stop loss insurance sales in the United States. The reduction in travel and stop loss insurance sales resulted from the previously announced strategic decision to exit the Affinity, Direct TV and Direct Mail distribution channels.
Market consistent value of new business
Market consistent value of new business (MCVNB) increased by 28% to EUR 304 million driven by the Americas and Europe. The increase in MCVNB in the Americas resulted from tax reform, a favorable product mix and updated expense assumptions, which more than offset lower life and accident & health sales. The MCVNB in Europe doubled as a result of an enhanced sales mix in Spain & Portugal and improved margins on the platform business in the United Kingdom.
Revenue-generating investments increased by 1% compared with the end of 2017 to EUR 825 billion. Net inflows and the strengthening of the US dollar more than offset the divestment of Aegon Ireland.
Shareholders' equity decreased by EUR 0.1 billion to EUR 20.5 billion on June 30, 2018, as retained earnings and strengthening of the US dollar were more than offset by a lower revaluation reserve as a result of increased interest rates in the United States. Shareholders' equity excluding revaluation reserves and defined benefit plan remeasurements increased by EUR 0.6 billion to EUR 18.0 billion – or EUR 8.68 per common share – at the end of the first half 2018. This increase reflects retained earnings and strengthening of the US dollar.
Gross financial leverage ratio
The gross financial leverage ratio increased by 30 basis points to 28.9% as the increase in shareholders' equity was more than offset by a temporary increase in leverage as a result of refinancing activities.
On April 11, 2018, Aegon issued USD 800 million Tier 2 subordinated debt securities, first callable on April 11, 2028, and maturing on April 11, 2048. The coupon is fixed at 5.5% until the first call date and floating thereafter with a margin including a 100 basis points step-up. The net proceeds from this issuance are being used to redeem grandfathered subordinated debt and for general corporate purposes.
Effective May 15, 2018, Aegon redeemed USD 525 million 8% grandfathered Tier 2 subordinated notes. On May 24, 2018, Aegon exercised its right to redeem the EUR 200 million 6% perpetual capital securities. The redemption of these grandfathered Tier 1 securities was effective on July 23, 2018, when the aggregate principal amount was repaid together with any accrued and unpaid interest.
The redemption of the aforementioned grandfathered Tier 1 securities, together with the maturity of EUR 500 million senior debt in August 2018, is expected to lead to an improvement in the gross financial leverage ratio by approximately 200 basis points in the second half of 2018.
Holding excess cash
Holding excess cash increased from EUR 1,354 million to EUR 1,923 million during the first half of the year. Aegon has earmarked EUR 700 million to reduce leverage in the second half of 2018. The group received EUR 593 million in remittances from subsidiaries, of which EUR 390 million from the United States and EUR 203 million from Europe, including from the Netherlands and United Kingdom. The divestment of Aegon Ireland added a further EUR 196 million to holding excess cash. In addition, refinancing activities led to a temporary increase in holding excess cash by EUR 200 million.
These cash inflows were partly offset by EUR 167 million for the cash portion of the final 2017 dividend, EUR 163 million cash outflows mainly related to holding funding and operating expenses and EUR 87 million capital injections to support growth of the business, and to strengthen the capital positions of Aegon's own business in Spain and its joint venture in Japan.
Capital generation of the operating units amounted to EUR 1,386 million for the first half of 2018. Market impacts and one-time items totaled EUR 628 million. Market impacts were mainly driven by the favorable impact from equity market and interest rate movements in the United States, and positive impact from credit spread and equity market movements in the United Kingdom. One-time items included the benefit from the divestment of Aegon Ireland, capital release from exiting the Affinity, Direct TV and Direct Mail distribution channels in the United States, and management actions in the United Kingdom. These more than offset the negative impact of lowering the Ultimate Forward Rate (UFR), the capital strain from investments in illiquid assets, and model updates in the Netherlands.
Solvency II ratio
Aegon's Solvency II ratio increased from 201% to 215% during the first half 2018 mainly due to normalized capital generation, market impacts and management actions, which were only partly offset by the final 2017 dividend.
The estimated RBC ratio in the United States increased to 490% on June 30, 2018, from 472% at the end of 2017. This increase was mainly driven by normalized capital generation, the positive impact from equity market and interest rate movements, and management actions, which were only partly offset by other items including remittances to the group. The benefit from management actions was mostly driven by the release of capital as a result of the previously announced strategic decision to exit the Affinity, Direct TV and Direct Mail distribution channels.
The estimated Solvency II ratio in the Netherlands decreased to 190% on June 30, 2018, from 199% at the end of 2017. Normalized capital generation was more than offset by remittances to the group and one-time items, including the lowering of the UFR by 15 basis points to 4.05%, capital strain from investments in illiquid assets, and model updates. Market impacts had a minor negative impact on the ratio, as the increase in Own Funds was offset by an increase in SCR, mostly as a result of credit spread movements.
The estimated Solvency II ratio in the United Kingdom increased to 197% on June 30, 2018, from 176% at the end of 2017. The increase was mainly driven by normalized capital generation, the positive impact from credit spread and equity market movements, and management actions, which were only partly offset by other items including remittances to the group. Management actions included derisking of the investment portfolio, funds restructuring and a temporary benefit from changes in the equity hedging program, which is expected to reverse in the second half of the year.
Interim 2018 dividend
Aegon aims to pay out a sustainable dividend to allow equity investors to share in Aegon's performance, which can grow over time if Aegon's performance so allows. The 2018 interim dividend amounts to EUR 0.14 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 interim 2018 stock dividend on earnings per share in the fourth quarter of this year, barring unforeseen circumstances.
Aegon's shares will be quoted ex-dividend on August 24, 2018. The record date is August 27, 2018. The election period for shareholders will run from August 29 up to and including September 14, 2018. The stock fraction will be based on the average share price on Euronext Amsterdam, using the high and low of each of the five trading days from September 10 through September 14, 2018. The stock dividend ratio will be announced on September 19, 2018, and the dividend will be payable as of September 21, 2018.
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