Aegon reports second half 2019 results
2H 2019 Results | AEX:AGN | NYSE:AEG
Net income increases to EUR 910 million, reflecting better result on fair value items and lower Other charges
- Underlying earnings before tax decrease by 5% to EUR 963 million due to impacts from lower interest rates in the Americas, and a change in the recognition of interest expenses related to debt refinancing. Earnings growth in other regions is from favorable claims experience and business growth
- Fair value gains of EUR 168 million, driven by positive real estate revaluations in the Netherlands and the US
- Realized gains on investments of EUR 131 million, mostly in the US
- Other charges of EUR 188 million relate mainly to model and assumption changes, restructuring charges, and IFRS 9 / 17 project costs
- Net income of EUR 910 million leads to improvement of the gross financial leverage ratio to 28.5%
- Return on equity of 9.5% in the second half of 2019
Elevated net outflows due to US Retirement Plans; insurance sales growth in key focus areas
- Gross deposits increased by 38% to EUR 80 billion, mainly driven by Aegon Asset Management
- Net outflows of EUR 22.5 billion, as a result of contract discontinuances in US Retirement Plans and outflows in the US annuity businesses, partly offset by continued external third-party net inflows in Asset Management
- New life sales increase by 15% to EUR 456 million following business growth in Asia, and higher pension sales in the Netherlands
- Accident & Health insurance sales are up by 19% to EUR 113 million, mainly driven by a large disability contract win in the Americas
- Property & casualty new premium production up by 6% to EUR 64 million, driven by business growth in Spain
Increased dividend based on strong capital position and normalized capital generation
- Proposed final 2019 dividend per share of EUR 0.16; full-year dividend increases by 7% compared to 2018
- Solvency II ratio above the target zone at 201%. The 4%-points increase in the second half of 2019 is mainly from management actions, including longevity reinsurance in the Netherlands, which are partly offset by adverse impacts of assumption changes. The Solvency II ratio of Aegon the Netherlands increased to 171%
- Capital generation of EUR 1,183 million, including favorable one-time items of EUR 304 million and positive market impacts of EUR 24 million. Normalized capital generation after holding expenses of EUR 855 million
- Holding excess cash at EUR 1.2 billion
"In the second half of 2019 we continued to operate in a challenging environment. Our underlying earnings were impacted by low interest rates while we experienced net outflows in our US retirement and annuity businesses. As a result we achieved a return on equity of 9.5%, below our target of 10%. However, we increased our capital generation which, combined with a number of management actions, enabled us to maintain a strong capital position. This allows us to announce a final dividend of 16 eurocents, increasing our full-year dividend by 7%.
We continue to execute on our strategy, simplifying Aegon's structure and becoming more proactive in managing our businesses. We have accelerated the release of capital from our mature businesses in the Netherlands by insuring the longevity risk associated with 12 billion euro of liabilities under Solvency II. Also, we completed the sale of our stake in our Japanese joint ventures with Sony Life in early 2020. In our growth businesses, we completed the Cofunds integration, thereby achieving the targeted expense savings and confirming our position as largest player in the UK platform market. Commercial momentum has improved with an increase in Life and Accident & Health sales, and higher gross deposits.
As a major investor, we also take our responsibility towards society, and we combine our promise of a secure and healthy financial future for our customers with caring about the environment. Our updated Responsible Investment Policy expands the criteria for excluding companies with coal-related activities from our investments."
- Drive for Growth: United Kingdom delivers on run-rate savings from Cofunds integration, and Aegon Asset Management organizationally realigns to focus on growth
- Scale-up for Future: Insurance joint venture in China with high sales leveraging e-commerce partnership
- Manage for Value: Successful longevity reinsurance deal contributes to restoring dividend paying capacity of Aegon the Netherlands
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 to a customer needs-driven company. This means serving diverse and evolving needs across the customer life cycle by being a trusted partner for financial solutions that are relevant, simple, rewarding, and convenient. Aegon aims to develop long-term customer relationships by providing guidance and advice, and identifying additional financial security needs at every stage of customers’ lives.
In the second half of 2019, we continued focusing on execution of our strategy. The company continues to simplify its business while focusing on sustainable growth in sales and capital generation. By developing long-term relationships with Aegon’s large customer base, and further improving customer engagement, the company strives for profitable organic growth. Active and structured portfolio management enables Aegon to create value for all its stakeholders including shareholders, business partners and customers. Sustainably growing capital generation is the basis of being able to provide shareholders with attractive returns, now and in the future.
Aegon groups its businesses into three distinct categories – Drive for Growth, Scale-up for Future, and Manage for Value:
- The vast majority of Aegon’s investments are directed to multi-product, digitally‑enabled and relationship-based Drive for Growth businesses which are at the core of the strategy and will drive future capital generation.
- Scale-up for Future businesses are aimed at capturing meaningful new opportunities in a systematic way.
- Manage for Value category consists of at-scale businesses, which are mostly spread-based, single-product relationships which are managed for value while keeping customers' interests at heart.
All units within the Asian and Southern and Eastern European regions are positioned in the Drive for Growth and Scale-up for Future categories. A natural next step was to change the way the group is organized. To manage these businesses more efficiently, Aegon has announced the creation of Aegon International as of January 1, 2020. This brings Aegon’s operations in Asia and Southern and Eastern Europe under a single leadership structure. The objective of this new division is to accelerate growth and value creation by further leveraging cross-border synergies through the development of new business models and realizing operational efficiencies.
On December 12, 2019 Aegon hosted an Analyst & Investor webinar that highlighted how the company is particularly well-positioned to capture growth opportunities in Brazil, Spain and Asia, as well as through its online banking business in the Netherlands. The businesses featured in the webinar, which are predominantly in the Scale-up for Future category, are focused on innovative and easy-to-use solutions and services that customers need in a fast-changing world. A replay of the webinar is available on Aegon.com.
Aegon remains committed to doing business in a responsible way by contributing to smart financial planning, promoting healthy lifestyles, and providing relevant solutions at every stage of the lives of its customers. Furthermore, the company takes a thoughtful approach to secure retirement and healthy aging in society, and aims to make a lasting contribution to a healthy environment through investments and active ownership. Aegon invests, where it can, to bring social benefits to the fore and contribute to a healthier environment. To support this approach, Aegon has put in place a new Group Responsible Investment policy. The new policy is effective from January 1, 2020 and as a result new investments in large mining and utility companies that are expanding their coal-related operations have been ceased within Aegon.
In order to execute our strategy successfully, employees are Aegon’s prime assets. A continuous feedback loop is in place, exemplified by the ninth consecutive global employee survey. The 2019 survey was completed by over 86% of all Aegon employees worldwide, and showed improvement in overall engagement, which increased by 2 points to 67 out of a maximum 100 points. The improvement in engagement over the last year demonstrates Aegon’s ongoing work to become the most preferred employer in the sector, which is enabling Aegon to attract and develop the talent required to best serve the needs of its customers.
Transamerica is experiencing a challenging economic and commercial environment, as underscored by net outflows across the business, especially in Retirement Plans. Low interest rates put pressure on business margins and drive an industry shift to more fee based businesses, further increasing competition in an already crowded market. Responsiveness to customers and distribution partners is key, and Transamerica is actively addressing previous service issues to improve retention and accelerate growth. In the second half of 2019, Transamerica’s continued focus on customer-centricity has led to improvements in early indicators for future growth, encouraging commercial momentum in certain focus areas and operational improvements.
Transamerica has invested in service and digital capabilities focused on improving the customer experience and increasing retention in Workplace Solutions. These investments are leading to higher customer satisfaction and are expected to stem plan sponsor withdrawals. Touchpoint NPS (tNPS) is a vital indicator of a customer’s thoughts about the level of service that they are receiving. Retirement service scores have seen a significant improvement and are now in the 50s, amongst the leaders based on benchmarking data of the investment industry. This is a key factor in driving written sales of Retirement Plans to an increase of 33% over prior year results.
Retention is critical in competitive businesses, and investments in customer service and operations are beginning to show up in leading indicators. The number of current plan sponsors that are initiating requests for proposal (RFPs) has fallen by 50% since 2018, pointing to a better outlook for contract discontinuances. RFP activity can be an early indicator of future retention because of the six to eighteen months it can take to change providers. At the same time, participant withdrawals are expected to remain at the higher levels we have seen in the past years, reflecting the increasing percentage of the American population in retirement.
Transamerica’s Advice Center is helping customers make financial decisions around their retirement, which allows the company to strengthen customer relationships and retain the assets within Transamerica. Over the last year, deposits to Individual Retirement Accounts (IRAs) through the Advice Center increased almost 40% to USD 1.4 billion, and the Advice Center recently reached USD 5 billion in IRA assets. Consolidation of assets from other sources into Transamerica retirement plans continues to grow supported by call center referrals and retirement planning counselor engagements, and in 2019, these deposits grew by over 50% to USD 2.4 billion. In addition, Transamerica offers the Managed Advice service to 100% of the plans in the large market along with a growing number of mid-market plans adopting it as well. Managed Advice has had a continuous increase in participants and assets under management since the end of 2018.
The SECURE Act was passed in December 2019, representing the most significant legislation on retirement security in over a decade. It will have significant relevance to Transamerica’s Retirement Plans business. The SECURE Act was championed by Transamerica, which provided significant thought leadership and advocacy in enacting the legislation. Several of the provisions have been long-time priorities for Transamerica, including a provision which allows unaffiliated businesses to form multiple employer plans (i.e. open multiple employer plans). The SECURE Act makes it easier for plan sponsors to fulfill their fiduciary responsibilities by choosing insurance companies to provide annuities as either in-plan investment or a distribution option.
In Individual Solutions, continued progress towards operational excellence is underway. TCS’s performance against service level agreements continues to improve while focus remains on enhancements to support customer and advisor experience and growth. The launch of the first new product on TCS’s administrative platform (BaNCS) is now planned in the first half of 2020.
Nearly 200 Transamerica employees were transferred to LTCG as part of the partnership announced in March 2019, which established LTCG as a partner in the administration of long-term care. Experience from the TCS transition was applied, which helped the transition to go smoothly. As with the TCS arrangement, these transferred employees will continue to support Transamerica customers, ensuring service continuity. LTCG’s advanced data analytics, actuarial and risk management capabilities are aligned with providing an excellent experience for customers.
Fixed Indexed Annuity product availability has been extended into California, a major market for Transamerica, with an expectation that this will drive sales opportunity in 2020. Gross deposits in the second half of 2019 for fixed indexed annuity sales grew by 59% to USD 206 million, which was helped by a new distribution relationship which is expected to continue to add to sales momentum going forward.
Enhancements to Transamerica’s variable annuity product suite earlier in 2019 are yielding tangible results. Transamerica’s US variable annuity market share improved to 4.6% per end of December, based on LIMRA’s estimate of industry sales. This is a sizeable increase from the 3.2% market share in December 2018. In 2019, Transamerica made the strategic decision to protect its Variable Annuity distribution franchise, and accepted negative market consistent value of new business in the short term. Pricing actions were implemented in December, and Transamerica will take steps to further improve profitability while maintaining a competitive franchise.
In Europe, Aegon’s focus is on growing its modern digitally enabled businesses organically, and reinforcing its commitments to reallocate capital to future-proof businesses.
In the Netherlands, Aegon announced a longevity reinsurance deal, reinsuring about a quarter of its longevity exposure. This has reduced required capital and improved Aegon’s capital position. The reinsurance agreement with Canada Life Reinsurance, provides full protection against the longevity risk associated with EUR 12 billion of best-estimate liabilities under Solvency II. The longevity reinsurance agreement has no impact on the services and guarantees that Aegon provides to its policyholders, and is in line with Aegon’s strategy to release capital from mature, spread-based businesses. This supported Aegon the Netherlands’ move back in its Solvency II target zone. Aegon the Netherlands has remitted EUR 100 million to the Holding in February 2020.
As of January 1, 2020, employees of Aegon the Netherlands began accruing pension benefits in a defined contribution plan instead of the current defined benefit plan, in line with market trends. All entitlements accrued before that date will remain unchanged and are guaranteed. This was agreed with the trade unions and their respective members, and received a positive advice from the Works Council. The change of pension scheme protects Aegon’s capital position and reduces volatility in its pension expenses.
To improve insights into customers and better enable them to make decisions regarding their financial futures, the Netherlands organization has transitioned to an agile way of working. As a consequence, the organization is expected to become more effective and efficient in service delivery. In the second half of 2019, a new organizational structure was adopted which is fully centered around value streams, ensuring nimbleness and customer focus. As a result of the transition, changes to the senior management team were announced in January 2020.
Challenging competitive conditions in the Dutch individual life business have led to management deciding to stop underwriting new individual life policies effective March 2020. This includes term life and individual annuities for which new life sales totaled EUR 12 million in 2019. Aegon will continue to provide pension and non-life insurance products in the Netherlands.
In the United Kingdom, Aegon appointed Mike Holliday-Williams as the new CEO. This appointment signals Aegon's continuing commitment to build on the strong foundation of the United Kingdom business. In the past years, the business has been successfully modernized, transformed and repositioned. From this solid base, the aim is to grow the United Kingdom business further by focusing even more on customer centricity.
Following the successful Cofunds integration, Aegon has realized its GBP 60 million in annualized expense savings target as Cofunds’ legacy systems were decommissioned, an office was closed, and other operational efficiencies were realized. Aegon expects some residual restructuring expenses into 2020 related to further expense savings and additional economies of scale.
In December 2018, Aegon announced the expansion of its partnership with Banco Santander in Portugal. The transaction has been successfully closed in the second half of 2019 for a consideration of EUR 20 million. Under the transaction, the Portuguese joint ventures with Santander are expanded to the life and non-life new business in the former Banco Popular network, as well as the in-force business owned by Banco Popular’s insurance subsidiaries. Since October 2018, the new business has been recorded in Aegon’s Portuguese joint ventures, and in September and October 2019 the in-force business has also been transferred.
Aegon has successfully completed the sale of its 50% stake in the Japanese variable annuity joint ventures to partner Sony Life in January 2020. Aegon announced the agreement to sell its 50% stake in the variable annuity joint ventures in May 2019. The total cash proceeds are EUR 153 million (JPY 18.75 billion). The book gain under IFRS amounted to EUR 51 million and will be booked in the first half of 2020.
In China, the Aegon THTF insurance joint venture is partnering with a major e-commerce player to offer term life products on its e-commerce platforms. The first product launch in October led to sales of approximately USD 15 million, or about 45% of total Aegon THTF sales in the fourth quarter of 2019. The success and profitability of this product launch demonstrates the potential of this e-commerce model.
Aegon Life in India secured a major e-commerce partnership with Flipkart during the second half of the year, its third after signing distribution agreements with MobiKwik and PayTM in the first half of 2019. Aegon is the sole life insurance partner on the Flipkart platform, with targeted launches for group term and retail products in 2020.
Aegon Asset Management announced that it will integrate its European and US businesses. This important step leverages its extensive global resources to enhance customer outcomes and compete more aggressively with other major global asset managers. This final step to establish a globally integrated structure will see the simplification of the current operating model moving from a regional structure to one global operating management board headed by Asset Management’s global chief executive Bas NieuweWeme. The investment teams will be organized across four investment platforms for which Aegon has uniquely differentiated capabilities and believes it can be globally competitive - Fixed Income, Real Assets, Equities and Multi-Asset & Solutions.
Responsible investing is a key element of Aegon Asset Management’s strategy. In 2019, Aegon Asset Management was recognized as a leading responsible and engaged investor by independent organizations like ShareAction and the Principles for Responsible Investment, and was ranked in the H&K Responsible Investment Brand Index as one of 36 leading ESG fund managers in Europe. Continuing its history of more than 30 years in providing customers with innovative and tailored responsible investment solutions, Aegon Asset Management launched the Sustainable Fixed Income strategy to capture compelling opportunities from sustainability investing. Aegon Asset Management continued expanding its engagement activities, entering into more than 500 corporate dialogues on ESG issues globally last year.
Underlying earnings before tax
Aegon’s underlying earnings before tax decreased by 5% to EUR 963 million compared with the second half of 2018. This was largely the result of negative impacts from lower interest rates, tighter credit spreads and portfolio updates on intangibles in the Americas. Furthermore, refinancing of debt led to a change in the recognition of interest expenses from equity to the income statement, negatively impacting the result of the Holding. The other reporting units showed growth in underlying earnings.
Underlying earnings from the Americas decreased by 11% to EUR 547 million. Excluding favorable currency effects, earnings declined by 14%, due mostly to a EUR 49 million negative impact from lower interest rates, tighter credit spreads and portfolio updates on intangibles in the Life business. In addition, worse-than-expected persistency for a block of 20-year level term life business impacted earnings adversely by EUR 10 million. Product exits in the Accident & Health business and lower interest margins in Fixed Annuities also contributed to the decrease of earnings. This was partly offset by favorable Retirement Plans earnings driven by strong equity markets.
Underlying earnings before tax from Aegon’s operations in Europe increased by 8% to EUR 437 million compared with the second half of 2018. The main contributor was the Netherlands, where earnings from the Life and Service businesses increased, driven by lower expenses, favorable claims experience and increased technical margins. Earnings from Non-life benefited from favorable claims experience, including a EUR 12 million reserve release in individual disability insurance. For the United Kingdom, earnings rose as a result of higher fee income in Digital Solutions. For Southern and Eastern Europe (SEE), earnings were stable despite the impact from the divestment of Aegon’s businesses in the Czech Republic and Slovakia, which closed in January 2019. The like-for-like earnings increase of 24% in SEE was mainly attributable to Spain, driven by favorable claims experience and expense savings.
Aegon’s underlying earnings in Asia increased by 27% to EUR 30 million. Excluding favorable currency movements, earnings increased by 23%. The increase was mainly due to higher earnings from the High-Net-Worth (HNW) businesses, as a result of higher surrender charges, favorable mortality experience, and lower expenses.
Underlying earnings before tax from Aegon Asset Management rose by 14% to EUR 79 million in the second half of 2019. This increase was a result of higher earnings in Aegon’s Chinese asset management joint venture Aegon Industrial Fund Management Company (AIFMC), and the asset management businesses in Central & Eastern Europe. For both regions, this was in part the result of increased performance fees. These positive results more than offset lower fee income as a result of outflows in the United Kingdom.
The result from the Holding declined to a loss of EUR 129 million, mainly as a result of increased project spend and a change in recognition of interest expenses. Interest expenses for the USD 925 million Tier 2 securities issued on October 16, 2019 are reported through the income statement, while the interest expenses for the USD 1 billion grandfathered Tier 1 perpetual capital securities redeemed on October 24, 2019 were recognized directly through equity, until the announcement of the redemption. Combined this led to an unfavorable impact on underlying earnings of EUR 17 million, despite the fact that the replacement resulted in EUR 15 million lower coupons on an annualized basis.
Net income increased significantly to EUR 910 million from EUR 253 million in the second half of 2018. This increase was mainly driven by fair value gains and lower Other charges.
Fair value items
The gain from fair value items amounted to EUR 168 million for the second half of 2019.
This was mostly driven by the results from fair value items in the Americas amounting to a gain of EUR 115 million. This primarily reflected a positive result on fair value investments, driven by a mark-to-market gain from valuation updates of real estate investment properties and more favorable equity markets than in the same period last year, partly offset by alternative investments underperformance.
The fair value items in the Netherlands, totaling a gain of EUR 94 million, are mainly driven by positive real estate revaluations, a gain on the guarantee provision and gains on interest rate hedges. The guarantee provision benefited from favorable market movements and data updates, which more than offset the impact of unfavorable credit spread movements.
Fair value losses in the United Kingdom totaled EUR 55 million, and were mainly driven by losses on inflation and equity hedges in place to protect the Solvency II position. In Southern and Eastern Europe and in Asia, a total of EUR 8 million fair value gains were reported.
Realized gains on investments
Realized gains on investments amounted to EUR 131 million, primarily reflecting gains in the Americas. These were largely due to bond calls and prepayments, mortgage loan gains, and normal trading activity.
Net impairments amounted to a gain of EUR 17 million. This was primarily driven by a gain of EUR 32 million for the Americas, which in turn was mainly due to recoveries from multiple structured assets, all of which were originally impaired between 2008 and 2013. The Netherlands recorded EUR 16 million of impairments, mainly in the consumer loan portfolio of the bank.
Other charges of EUR 188 million resulted from model and assumption changes, restructuring charges, and strategic project expenses.
Assumption updates in the Americas led to charges of EUR 75 million mainly from expense assumption updates. In the Netherlands, model and assumption updates resulted in EUR 56 million charges related to model enhancements and expense assumptions which more than offset favorable longevity assumption changes.
Restructuring charges were in total EUR 124 million. In the United Kingdom, EUR 52 million restructuring charges were driven by Cofunds integration expenses and transition & conversion charges related to the agreement with Atos for administration services in the Existing Business. The Netherlands incurred EUR 46 million restructuring charges, which related mainly to the restructuring of Aegon Bank, and to the transfer of the administration of certain parts of the defined benefit book to TKP. The Americas reported EUR 16 million restructuring charges, mainly related to the TCS and LTCG operations administration partnerships.
Furthermore, the Netherlands reported one-time expenses of EUR 6 million related strategic projects. Other charges in SEE, Asia and Asset management totaled EUR 14 million. For the Holding, Other charges amounted to EUR 53 million and predominantly related to IFRS 9 / 17 project costs.
Other income mainly consists of a EUR 104 million provision release related to the employee pension plan in the Netherlands, and EUR 30 million in the United Kingdom mainly related to a one-time provision release and income related to policyholder tax.
The result from run-off businesses increased to a profit of EUR 15 million, driven mainly by higher income from the retained individual life reinsurance business.
Income tax amounted to a charge of EUR 195 million, while income before tax was EUR 1,105 million, resulting in an effective tax rate on income before tax of 17.6% in the second half of 2019. The effective tax rate reflects tax exempt income and the use of tax credits in the United States. It was also impacted favorably by one-time tax benefits from the own employee pension plan moving into surplus in the United Kingdom.
Return on equity
Return on equity decreased by 70 basis points compared with the same period last year to 9.5% in the second half of 2019. The decrease was mainly caused by lower underlying earnings before tax, which were partly offset by one-time tax benefits.
Operating expenses increased by 5% to EUR 2,011 million. This mainly reflects investments to support growth and to build digital and technological capabilities, higher IFRS 9 / 17 implementation expenses, and higher restructuring cost.
Gross deposits increased by 38% to EUR 80 billion. This growth can be largely attributed to Asset Management. Aegon’s Chinese asset management joint venture, Aegon Industrial Fund Management Company (AIFMC), recorded a significant increase of gross deposits as a result of the success of new funds launched, and strong inflows in money market funds. Gross deposits in the Americas of EUR 18.8 billion were in line with the same period last year. In Europe, gross deposits increased by 12% to EUR 13.4 billion as gross deposits in the Netherlands were driven by continued momentum at online bank Knab, and sales of new-style defined contribution products, so-called Premium Pension Institute products. Gross deposits in the United Kingdom increased slightly, as a slowdown in retail business was offset by strong Workplace gross deposits due to new business and ongoing regular premiums.
Net outflows amounted to EUR 22.5 billion for the second half of 2019 mainly due to contract discontinuances in Retirement Plans in the Americas. These contracts were only marginally profitable, and the impact to future earnings is limited. Variable Annuities and Fixed Annuities also recorded net outflows as these businesses continue to mature. For Europe, the United Kingdom had limited net outflows, driven by the anticipated decline of the Existing Business. These were offset by slightly improved net inflows in the Netherlands, reflecting good sales at Knab and new-style defined contribution pension products. For Asset Management, strong third-party net flows were recorded, primarily from AIFMC as a result of newly launched funds and continued business growth. 2019 was the eighth consecutive full year of positive external third-party net inflows. This reflects Aegon Asset Management’s competitive performance, together with management’s ability to leverage scale and capabilities from the general account and affiliate businesses.
New life sales rose by 15% to EUR 456 million. This was mainly driven by Europe, where pension sales in the Netherlands were strong following a pension buy-out deal and a purchase of additional yearly pension increases by an existing customer. The other main contributor was Asia, where Aegon’s insurance joint venture in China increased sales as a result of a successful product launch, leveraging the platform of a large e-commerce partner.
New premium production for Accident & Health insurance increased by 19% to EUR 113 million. This was predominantly driven by the Americas as a result of onboarding a significant disability contract, which more than offset lower other workplace voluntary benefits sales and the previously announced strategic decision to exit certain products. Europe added to the increased production by a new accident product that was introduced in Spain. For property & casualty insurance, new premium production increased by 6% to EUR 64 million, driven by business growth in Spain.
Market consistent value of new business
Market consistent value of new business (MCVNB) decreased by 17% to EUR 195 million. The decline was largely due to Variable Annuities in the United States, reflecting the significant decline in interest rates, which led to negative margins. This was partially offset by higher MCVNB in the United Kingdom, primarily from higher margins on workplace business.
Revenue-generating investments increased by 3% during the second half of 2019 to EUR 898 billion. This reflects primarily favorable market movements, which more than offset net outflows.
Shareholders’ equity increased by EUR 1.0 billion in the second half of 2019 to EUR 22.5 billion on December 31, 2019. This was driven by higher revaluation reserves due to lower interest rates, and increased retained earnings which more than offset the impact of low interest rates on the remeasurement of the defined benefit obligations. Shareholders’ equity excluding revaluation reserves increased by EUR 0.4 billion to EUR 16.7 billion – or EUR 8.06 per common share – at the end of 2019.
Gross financial leverage ratio
The gross financial leverage ratio improved by 80 basis points to 28.5% in the second half of 2019, which is within Aegon’s 26% – 30% target range. In the second half of 2019, Aegon successfully issued USD 925 million Tier 2 securities, with a fixed coupon of 5.1%. The proceeds were used to redeem USD 1 billion grandfathered Tier 1 securities with a coupon of 6.375%. In addition, EUR 75 million of senior debt matured in the second half of 2019. This reduction in leverage, in combination with higher shareholders’ equity excluding revaluation reserves, resulted in the improvement of the gross financial leverage ratio.
Holding excess cash
Aegon’s holding excess cash position decreased from EUR 1,632 million to EUR 1,192 million during the second half of the year, which is within the target range of EUR 1.0 billion to EUR 1.5 billion. The decline resulted mainly from dividends to shareholders, deleveraging, and holding funding and operating expenses more than offsetting gross remittances from subsidiaries.
The group received EUR 595 million gross remittances from subsidiaries, of which EUR 406 million came from the Americas, EUR 139 million from Europe, EUR 27 million from Asia and EUR 20 million from Asset Management. While Aegon the Netherlands retained its planned remittances in 2019, following management actions it was within its Solvency II target range at year end, and remitted EUR 100 million to the Group in February 2020.
Capital injections of EUR 254 million primarily related to investments in business growth and earn-out payments in Europe. In Spain, EUR 115 million of earn-outs were paid to Santander, related to the performance of the joint venture since the start of the partnership in 2013. Furthermore, Aegon Spain received EUR 75 million of capital injections to ensure that all legal entities’ Solvency II ratios remained in the target zone, as transitionals and matching adjustments are no longer used. Other capital injections of EUR 63 million were mainly to fund business growth in the bank in the Netherlands, and Aegon’s Chinese insurance joint venture, Aegon THTF.
In the second half of 2019, EUR 456 million holding excess cash was deployed for the cash portion of the interim 2019 dividend, and the share buybacks aimed to prevent the dilutive effect from 2018 final and 2019 interim stock dividend. Debt deleveraging, including the associated expenses, decreased holding excess cash by EUR 159 million in total. The remaining cash outflows of EUR 166 million mainly related to holding funding and operating expenses.
Capital generation after holding expenses amounted to EUR 1,183 million for the second half of 2019. This included favorable one-time items of EUR 304 million and positive market movements of EUR 24 million in total. As a consequence, normalized capital generation amounted to EUR 855 million which is 6% higher than in the second half of 2018. Growth in capital generation was mainly driven by a higher release of required capital in the Americas and by positive experience variances in the Netherlands. One-time items included positive management actions, most notably the longevity reinsurance transaction in the Netherlands, which were partly offset by unfavorable model and assumption changes.
Solvency II ratio
Aegon’s Group Solvency II ratio increased from 197% to 201% during the second half of 2019, and is now above the target zone of 150% – 200%. The ratio increased primarily due to strong normalized capital generation and the positive effect of management actions lowering the risk profile of the Group. The increase was partly offset by the external dividend payments, the negative impact of model and assumption changes, and the impact of a lower diversification benefit at Group level resulting from market movements and changes to hedging programs.
The estimated RBC ratio in the United States remained stable at 470% on December 31, 2019, compared to 472% on June 30, 2019, and is far above the bottom-end of the target range of 350%. The positive impacts from management actions, such as the merger of Transamerica Advisors Life Insurance Company and Transamerica Life Insurance Company, were partly offset by statutory expense assumption changes and dividend payments by the US regulated entities to the US holding company in excess of capital generation. This is in line with the annual pattern of dividend payments to the US holding and was in part used for a contribution to the own employee pension plan.
The estimated Solvency II ratio in the Netherlands increased to 171% on December 31, 2019, from 152% on June 30, 2019. This was mainly the result of management actions and normalized capital generation. As a result, the Netherlands is back above the bottom-end of its target range of 155%. The main management action was the longevity reinsurance transaction with Canada Life Reinsurance, which led to significantly lower required capital. In addition, a number of derisking actions were performed on the asset portfolio. The Solvency II ratio was negatively impacted by model and assumption changes. These included the negative impact from model enhancements and expense assumption changes, which more than offset favorable longevity assumption changes. Furthermore, the factor applied when calculating the loss-absorbing capacity of deferred taxes (LAC-DT) was lowered from 75% to 65%, mainly as a consequence of lower interest rates, leading to a negative impact on the Solvency II ratio. Market movements led to a positive impact. The positive impact from mortgage spread tightening was partly offset by a lowering of the EIOPA volatility adjuster, and adverse sovereign and corporate bond spread movements. The latter was driven by a decrease in the spreads used, as part of a tailored methodology, to determine the liabilities related to the own employee pension plan. In addition, lower interest rates led to a slight negative impact as a result of an increase in required capital.
The estimated Solvency II ratio in the United Kingdom decreased to 157% on December 31, 2019, from 165% on June 30, and remained above the bottom-end of the target range of 145%. The decrease was driven by a negative impact from assumption updates, mainly due to expense assumptions, and the remittance to the Holding. These impacts more than offset normalized capital generation.
Final 2019 dividend
Aegon aims to pay out a sustainable dividend to allow equity investors to participate in Aegon’s performance, which can grow over time if Aegon’s performance so allows. At the Annual General Meeting of Shareholders on May 15, 2020, the Supervisory Board will, in the absence of unforeseen circumstances, propose a final dividend for 2019 of EUR 0.16 per common share. If approved, and in combination with the interim dividend of EUR 0.15 per share paid over the first half of 2019, Aegon’s total dividend over 2019 will amount to EUR 0.31 per common share. This is an increase of EUR 0.02 per share or 7% compared with the 2018 dividend. 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 intends to neutralize the dilutive effect of the final 2019 stock dividend on earnings per share in the third quarter of 2020, barring unforeseen circumstances.
If the proposed dividend is approved by shareholders, Aegon shares will be quoted ex-dividend on May 19, 2020. The record date for the dividend will be May 20, 2020. The election period for shareholders will run from May 26 up to and including June 12, 2020. The stock fraction will be based on the average share price on Euronext Amsterdam from June 8 until June 12, 2020. The stock dividend ratio will be made public on June 12, 2020, and the dividend will be payable as of June 19, 2020. .
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