2H 2020 Results | AEX:AGN | NYSE:AEG
Improved operating performance; dividend well covered by Free Cash Flows
- Net loss of EUR 147 million in the second half of 2020, mainly as a result of an increase of the value of liabilities in the Netherlands due to tightening credit spreads, reversing the movement seen in the first half of the year
- Underlying earnings before tax increase by 7% to EUR 1,029 million driven by the benefit from higher equity markets in the United States and Asset Management, and expense savings. COVID-19 had a manageable impact, as it led to both adverse mortality and favorable morbidity in the US, which broadly offset each other
- Cash Capital at Holding is within the operating range at EUR 1.1 billion; capital ratios of three main units are above their respective operating levels
- Proposed final dividend 2020 of EUR 0.06, bringing the full-year dividend to EUR 0.12 per common share or EUR 247 million. The proposed dividend is well covered by the full-year Free Cash Flows of EUR 530 million
- Gross financial leverage reduces to EUR 6.0 billion following repayment of USD 500 million senior debt
Statement of Lard Friese, CEO
"The second half of 2020 continued to be challenging for our customers, colleagues, and the communities in which we operate. I am proud of the continued commitment of our employees to provide support and uninterrupted service to our customers and business partners in the midst of the pandemic.
In these circumstances, we have worked on our plans to transform Aegon and have laid out a clear road map to improve our performance. In the second half of the year, we took the first concrete steps to deliver on these plans. We sharpened our strategic focus with the announced divestments of our operations in Central & Eastern Europe, restructured our businesses in India, Hong Kong and Singapore, decided to cease funding of GoBear, and delivered 260 initiatives relating to our performance improvement plan. As a result, we have reduced the addressable expense base by more than EUR 75 million in 2020 and remain on track to deliver half of our 2023 target of EUR 400 million savings by the end of 2021.
By proactively managing our balance sheet, we have ensured that the capital ratios of our three main units ended the year above their respective operating levels. Examples of actions we have taken to strengthen our balance sheet range from the reinsurance of disability risk in our Dutch non-life business to the sale of the Transamerica Pyramid. We have also taken a first step towards reaching our deleveraging target by repaying USD 500 million senior debt. Last year's rebasing of the dividend ensures that it is sustainable and well covered by the Free Cash Flows that we generate, even in reasonable stress scenarios. We will propose a final dividend for 2020 of EUR 0.06 per common share at our 2021 Annual General Meeting, bringing the full-year dividend to EUR 0.12. Our aim is to grow the dividend per share from here in line with recurring Free Cash Flows to around EUR 0.25 over 2023.
We enter 2021 with momentum, but conscious of the fact that there is a lot of work to do to drive further operating improvements. We are establishing dedicated teams to manage our Financial Assets and will continuously look for ways to maximize their value. To further reduce our risk profile, we are reviewing our US variable annuity hedging program. We will share the outcomes once the required foundational work is completed. In our Strategic Assets, we will continue to invest in products and services for our customers to drive profitable growth. We will maintain a strong balance sheet to deal with potential market volatility and deliver on our dividend growth objectives. We are fully focused on delivering the plans outlined at our recent Capital Markets Day to turn Aegon into a more enduring, high performance company."
Aegon is taking significant steps to transform the company in order to improve its performance and create value for its customers and shareholders. To ensure delivery against these objectives, a rigorous and granular operating plan has been developed across the Group. Aegon focuses on three core markets (the United States, the Netherlands, and the United Kingdom), three growth markets (Spain & Portugal, China, and Brazil) and one global asset manager. Aegon's businesses in its core markets have been separated into Financial Assets and Strategic Assets. The aim is to release capital from Financial Assets and from businesses outside its core markets, and re-allocate capital to growth opportunities in the Strategic Assets, growth markets and Asset Management. Throughout this transformation, the company aims to maintain a solid capital position in the business units and at the Holding. Through proactive risk management actions, Aegon is improving its risk profile and reducing the volatility of its capital ratios.
Operational improvement plan
In the second half of 2020, Aegon developed an ambitious plan comprised of more than 1,100 detailed initiatives designed to improve the operating performance of its business by reducing costs, expanding margins and growing profitably. The program has had a good start, with 260 initiatives delivered at the end of 2020, of which the majority relates to expense savings. It generally takes more time to execute growth initiatives, as significant investments need to be made to improve customer service, enhance the user experience and develop new products. The company will keep a good pace in executing on these initiatives.
Strategic Assets are businesses with a greater potential for an attractive return on capital, where Aegon is well positioned for growth. In these businesses, Aegon will invest in profitable growth by expanding its customer base and increasing its margins.
In the US Individual Solutions business, Transamerica realized sales growth in Term Life and Index Universal Life, two of the main products that it will focus on going forward, both compared to the same period last year and throughout each quarter in 2020. Transamerica's market share gain in Index Universal Life has been advanced by adding a funeral concierge benefit at no direct cost for qualifying life insurance policyholders. Transamerica developed this new benefit, to provide grieving beneficiaries valuable resources to help plan the funeral of the insured person and other end-of-life services. The addition of this benefit and the growth of World Financial Group contributed to an 11% increase in sales of Index Universal Life, Transamerica's flagship life insurance product, to USD 105 million, compared to the second half of 2019.
In the US Workplace Solutions business, Transamerica aims to remain a top-5 player in new mid-market sales. Momentum has built in the mid-market with written sales of USD 2.2 billion in the second half of 2020. This represented a decrease of only 4% compared with the exceptionally high sales in the second half of 2019, and an increase of 49% compared to the first half of 2020. Furthermore, Transamerica increased the participation of ancillary services, which supports its aim to expand its margins.
In the Netherlands, Aegon aims to maintain its leading positions in defined contribution pensions and mortgage origination. In the second half of 2020, Aegon the Netherlands originated EUR 5.5 billion of residential mortgages. This brings the total origination volume for 2020 to EUR 11 billion. Of the total mortgages originated in 2020, 66% were fee-based mortgages originated for third-party investors. Aegon is the largest third-party mortgage originator in the Netherlands, benefiting from its scale, high service levels to intermediaries and customers, and diversified funding. Net deposits for defined contribution PPI products increased by over 50% to EUR 481 million in the second half of 2020. Aegon's PPI offering is low-cost thanks to the scale of its administration subsidiary, TKP, which services 4 million pension participants in the Netherlands.
In the United Kingdom, Aegon's aim is to achieve sales growth and positive net deposits in both the Retail and Workplace channels. In the second half of 2020, net deposits in Workplace remained positive at GBP 0.1 billion. The pipeline for new contract wins remains healthy. For Retail, net outflows amounted to GBP 0.7 billion, which is a GBP 0.3 billion improvement compared to the second half of 2019 as a result of better retention rates. By investing in front-end portals and service for advisers and customers, Aegon aims to further invest in the Retail channel to increase momentum. These investments will take place in the coming 18 months and are expected to lead to an improvement in net deposits over time.
Financial Assets are blocks of business which generally have closed for new sales, and which are capital intensive with relatively low returns on capital employed. Aegon is establishing dedicated teams to manage these businesses, which are responsible for maximizing their value through disciplined risk management and capital management actions.
In the second half of 2020, Transamerica continued its successful track record of dynamically hedging the in-force block of variable annuity business with guaranteed minimum withdrawal benefits (GMWB) for equity and interest risk, with a hedge effectiveness of 98%. The company is reviewing the potential to also move to a full dynamic hedge program for its legacy block of variable annuities and expects to provide an update on this later in 2021.
After successfully completing 90% of the USD 1.1 billion rate increase program for its Long-Term Care block of business initiated in 2016, Transamerica launched a new rate increase program which includes the remaining portion of the 2016 program. Over the coming years, Transamerica will seek to obtain approvals for rate increases with a combined value of USD 300 million. This new program provides additional options for policyholders in some cases. In the second half of 2020, claims experience developed favorably for the Long-Term Care business as a result of fewer new claims and increased claims terminations, due to the impact of the COVID-19 pandemic. This led to an actual to expected claims experience of 71% for the second half of 2020.
Aegon's Dutch Life business took several actions to stabilize the capital base in order to put it in a position to pay consistent remittances to the Group. To mitigate volatility caused by the basis risk between the EIOPA VA reference portfolio and its own asset portfolio, the Dutch Life business implemented internal model changes and invested more in corporate bonds. Furthermore, it decided to lower the factor applied when calculating the loss-absorbing capacity of deferred taxes (LAC DT) from 65% to 45% to reduce the sensitivity of this factor to economic variances going forward, and to take into account industry-wide Q&A and good practices recently published by the Dutch Central Bank. Additionally, the business implemented a quarterly remittance policy in the fourth quarter of 2020. To optimize the individual life and pension business and make its expense base more variable, Aegon's Dutch Life business has started to transfer the administration of these books to IBM and TKP respectively. In November, an important milestone was reached with the first large migration of group pension contracts to TKP.
Growth Markets and Asset Management
In its Growth Markets, Aegon will continue to invest in profitable growth. However, in the second half of 2020 new life sales in Growth Markets declined by 22% to EUR 92 million compared to the second half of 2019, as bank distribution in Spain & Portugal was impacted by the fall-out of the COVID-19 pandemic and sales in China were down from a record-high level in the second half of 2019. Despite lower sales, the inforce business continued to grow, as also underscored by higher earnings from these businesses. Going forward, Aegon will benefit from the expansion of its life and non-life insurance partnership with Banco Santander following its acquisition of Banco Popular. The expansion of the joint venture arrangement, for which Aegon's paid an upfront amount of EUR 187 million, closed in July 2020.
Aegon's Asset Management business benefits from its link with the Strategic Assets, as these offer platforms to distribute its competitive, proprietary investment solutions. The aim is to increase the share of platform assets under administration that are managed in-house. Aegon Asset Management's equity platform has been selected for a EUR 900 million sub-advisory responsible investment mandate from Transamerica on December 1, 2020. Furthermore, Transamerica launched two responsible investment bond mutual funds in September 2020, for which Aegon Asset Management is the sub-adviser. This underscores Aegon Asset Management's strong capabilities in both implementing ESG strategies and applying expert credit analysis. These sub-advisory mandates contributed to an improvement in net deposits from affiliates in the second half of 2020.
Smaller, niche or sub-scale businesses
In small markets or markets where Aegon has sub-scale or niche positions, capital will be managed tightly with a bias to exit.
On November 29, 2020, Aegon reached an agreement to sell its insurance, pension and asset management businesses in Hungary, Poland, Romania and Turkey for EUR 830 million to Vienna Insurance Group AG Wiener Versicherung Gruppe (VIG). The proceeds represent a multiple of 2.6 times the book value on June 30, 2020, and 15 times net underlying earnings in 2019. Aegon expects the transaction to close in the second half of 2021.
On October 9, 2020, Aegon announced the sale of Stonebridge, a UK-based provider of accident insurance products, to Global Premium Holdings group, part of Embignell group. Total proceeds amount to approximately GBP 60 million and are equal to one times Stonebridge's Solvency II Own Funds at year-end 2019. The transaction is subject to normal regulatory approvals and is expected to be completed in the first quarter of 2021.
In the fourth quarter of 2020, Aegon decided to restructure its TLB business as well as its business in India. TLB – the High-Net-Worth business operating in Hong Kong, Singapore, and Bermuda – has had a change in its management and has been rightsized in response to challenging market conditions through expense reduction initiatives. Moving forward, TLB will increase the usage of digitization and automation in its business operations to both increase efficiency and, at the same time, improve customer service. TLB will also pivot to products that are not only capital light, but will offer an attractive value proposition for its customers as well. This process began with the recent launch of TLB's first index-linked product – Genesis Indexed Universal Life – in both Bermuda and Singapore. In India, the unprofitable and sub-scale traditional sales channels were closed, as the company will focus fully on the digital distribution channel going forward. The closing of the traditional channel will lead to a headcount reduction of circa 800 FTE.
In January 2021, Aegon decided together with its joint venture partner to cease funding of GoBear, a digital financial supermarket in Southeast Asia. The business is being closed in a controlled manner, while maintaining optionality to divest all or parts of the business. The ongoing global pandemic has made the operating environment very challenging due to weakened demand for financial products, in particular travel insurance.
Strengthening the balance sheet
Aegon aims to continue to strengthen its balance sheet and is taking proactive management actions to improve its risk profile and reduce the volatility of its capital ratios.
At the Capital Markets Day on December 10, 2020, Aegon announced its plans to significantly reduce its interest rate risk in the US in order to lessen its dependency on financial markets and improve its risk profile. 25% of this plan had been executed by the end of 2020, primarily by lengthening the duration of its asset portfolio.
On October 29, Aegon announced the completion of the sale of the Pyramid building complex in San Francisco, California, for USD 650 million, while retaining the naming rights. The transaction will allow for a further diversification of the investment portfolio at favorable yields, thereby improving the risk profile of the Group. In addition, the sale further strengthened the company's balance sheet and led to a statutory capital benefit of USD 0.4 billion.
Effective October 1, 2020, Transamerica completed the legal entity merger of two of its main life insurance carriers in the United States. Transamerica Premier Life Insurance Company (TPLIC) merged into Transamerica Life Insurance Company (TLIC), with TLIC as the surviving entity. In addition, two of Transamerica's captive reinsurance companies merged into TLIC, MLIC Re I, Inc. effective October 1, 2020, and Pine Falls Re effective December 31, 2020. The premiums, benefits and guarantees for policyholders will not be affected by the legal mergers. The mergers not only simplify Transamerica's corporate structure, but also make the balance sheet of the surviving entity more resilient and add cash flow testing capacity, while there was a small positive upfront benefit to the US RBC ratio.
In December 2020, Aegon's Dutch Non-Life business reinsured part of its disability risk through a 60% quota share agreement with a panel of reinsurers. The transaction reduced concentration risk at an attractive cost of capital, and increased its Solvency II ratio by 49%-points. The Solvency II ratio of Aegon's Dutch Non-Life business stood at 176% at the end of 2020.
Underlying earnings before tax
Aegon’s underlying earnings before tax increased by 7% compared with the second half of 2019 to EUR 1,029 million. This was mainly driven by the benefit from higher equity markets in the United States and Asset Management and expense savings, which were only partly offset by the weakening of the US dollar against the Euro.
Underlying earnings before tax from the Americas amounted to EUR 556 million in the second half of 2020, an increase of 1% compared with the same period last year or 6% on a constant currency basis. This increase reflects higher Variable Annuities earnings, lower operating expenses, and EUR 91 million better than expected morbidity experience. These were only partly offset by EUR 83 million adverse mortality experience in the Life business and EUR 35 million other negative one-time items. The favorable morbidity and adverse mortality experience were both driven by the COVID-19 pandemic.
Aegon’s underlying earnings before tax in the Netherlands increased by 7% compared with the second half of 2019 to EUR 344 million. This was driven by higher investment income, higher fee income from the growth of the Service businesses and lower expenses. Expenses decreased primarily due to the impact of moving from a defined benefit plan to a defined contribution plan for the future pension accruals for Aegon’s own employees. Underwriting results in the Netherlands reduced as a result of higher reinsurance costs following the longevity reinsurance transaction in December 2019, and a EUR 14 million provision related to disability insurance.
Underlying earnings before tax from the United Kingdom decreased by 11% compared with the second half of 2019 to EUR 62 million. Higher earnings from the platform business were the result of growth in the Workplace channel, and lower expenses. These were, however, offset by lower earnings as a consequence of the gradual run-off of the traditional pension and unit-linked business, as well as the impact of the COVID-19 pandemic and market uncertainty on the sales and profitability of Aegon’s protection and distribution operations.
Underlying earnings before tax from International amounted to EUR 81 million in the second half of 2020, an increase of 10% compared with the prior year period. This was mainly driven by business growth in Spain & Portugal and China, which was partly offset by adverse claims experience in TLB, Aegon’s High-Net-Worth business.
Underlying earnings before tax from Aegon Asset Management were up by 41% to EUR 111 million in the second half of 2020. Strong performance of Aegon’s Chinese asset management joint venture – Aegon Industrial Fund Management Company (AIFMC) – far more than offset a decrease in earnings from Aegon’s Global Platforms. Performance fees net of performance-based compensation had a positive impact of EUR 56 million on the underlying earnings before tax from AIFMC in the second half of 2020. In addition, management fees for AIFMC increased as a result of higher asset balances, following the successful launch of five new funds as well as inflows into existing funds.
The result from the Holding improved by EUR 4 million compared with the second half of 2019 to a loss of EUR 125 million, reflecting lower operating and funding expenses.
The net loss for the period amounts to EUR 147 million compared with a net profit of EUR 908 million in the second half of last year, mainly due to fair value losses as a result of an increased value of liabilities in the Netherlands due to tightening credit spreads.
Fair value items
The loss from fair value items amounted to EUR 1,150 million in the second half of 2020.
The loss from fair value items in the Netherlands amounted to EUR 1,330 million, a reversal of a similar size fair value gain in the first half of 2020. The main driver was a decrease in the illiquidity premium, a reflection of credit spread tightening, leading to a significant increase of the fair value of IFRS insurance liabilities. This in turn increased the Liability Adequacy Test deficit.
In the Americas, the gain from fair value items amounted to EUR 256 million. This primarily reflected gains on fair value investments and unhedged risks, while hedges were effective for the targeted risks. The loss on hedges without an accounting match was driven by the macro equity hedge net of reserve movements, reflecting favorable equity markets in the second half of 2020.
Fair value losses in other units totaled EUR 76 million, driven by adverse results from equity hedges to protect the solvency position and fee income in the United Kingdom as a result of the significant increase in equity markets.
Realized gains on investments
Realized gains on investments amounted to EUR 135 million, reflecting normal trading activity and portfolio adjustments to lengthen the duration of the investment portfolio in Aegon International.
Net impairments on investments amounted to EUR 43 million. This was primarily caused by impairments on corporate bonds in the energy and communications sector, which were partly offset by recoveries on residential mortgage backed securities in the Americas and the unsecured loan portfolio in the Netherlands.
Other charges amounted to EUR 168 million, and were mainly driven by the Americas. These were largely attributable to an accrual in relation to the ongoing rehabilitation process of a reinsurer, and the restructuring of captives. Assumption updates in the Netherlands resulted in other income, more than offsetting restructuring costs across the Group, and IFRS 9 / 17 project costs in the Holding.
Income tax was a benefit of EUR 24 million, while the loss before tax was EUR 171 million. The effective tax rate of 14% is below the nominal tax rate mainly due to the announcement that the Dutch nominal tax rate will remain at 25% as from 2021, resulting in a reversal of earlier impacts from the previously anticipated lowering of the tax rate to 21.7%. This was only partly offset by the regular benefits from tax credits and non-taxable income.
Return on equity
Return on equity increased by 1.1%-points to 10.6% from a combination of higher net underlying earnings, lower cost of leverage, and lower shareholders’ equity.
Operating expenses decreased by EUR 149 million compared with the second half of 2019 to EUR 1,866 million, a decrease of 7% or 5% on a constant currency basis. The decline was mainly driven by a reduction in addressable expenses resulting from the performance improvement plan. Furthermore, expenses benefited from lower travel, marketing, and sales activities due to the impact of the COVID-19 pandemic.
Gross deposits increased by EUR 15 billion compared with the second half of 2019 to EUR 95 billion, driven by Asset Management, where external third-party gross inflows rose by EUR 24 billion to EUR 70 billion. This resulted from higher gross inflows at Aegon’s Chinese asset management joint venture, Aegon Industrial Fund Management Company (AIFMC), as a result of new fund launches and inflows into existing AIFMC funds. These were partially offset by EUR 5 billion lower gross deposits in the United Kingdom, driven by lower institutional platform deposits, which are low margin and can be lumpy. Gross deposits for most other channels in the United Kingdom were broadly in line with the previous period despite headwinds from the COVID-19 pandemic. Gross deposits in the Netherlands increased by 8% to EUR 8 billion, driven mainly by continued momentum at online bank Knab and in defined contribution pensions. In the Americas, gross deposits decreased by EUR 3 billion to EUR 15 billion due to three large contract discontinuances in Retirement Plans at the end of 2019 that led to lower recurring deposits this year.
Net deposits amounted to EUR 15 billion of net outflows for the second half of 2020. This was the result of EUR 16 billion net outflows in the Americas, largely attributable to Retirement Plans. The majority of Retirement Plans outflows were in the large market driven nearly equally by contract discontinuances and participant withdrawals. The United Kingdom also showed net outflows of EUR 6 billion driven by the institutional platform, while net deposits in the Workplace channel were positive and outflows in the Retail channel improved. Asset Management saw positive net deposits of EUR 6 billion, driven by AIFMC and net deposits on its Fixed Income Platform. The Netherlands had EUR 1 billion net deposits, driven by growth in its online bank Knab and its defined contribution pension business.
New life sales declined by 23% compared with the second half of 2019 to EUR 352 million. In the Americas, this was mainly driven by lower Whole Life sales, as a result of the decision to make product changes and sunset certain legacy products. This more than offset positive impact from Term Life pricing actions and increased Indexed Universal Life sales. New life sales in International and the Netherlands were down due to exceptionally high sales in the second half of 2019.
New premium production for Accident & Health insurance decreased by 45% to EUR 62 million, as the prior year period included a single large disability contract in the United States. The remaining decline results largely from the decision to exit the individual Medicare supplement market in the United States.
Market consistent value of new business
Market consistent value of new business (MCVNB) decreased by 20% compared with the second half of 2019 to EUR 155 million, largely caused by lower volumes in the United Kingdom, partly driven by the COVID-19 pandemic. Variable Annuities in the United States improved following repricing, leading to volume and product mix changes. This was partly offset by lower volumes and updated assumptions in the Health and Retirement Plans business.
Shareholders’ equity decreased by EUR 1.1 billion in the second half of 2020 to EUR 22.8 billion on December 31, 2020. This was driven by adverse currency movements, the net loss for the period and dividends to shareholders. As a consequence, shareholders’ equity excluding revaluation reserves decreased by EUR 1.2 billion, to EUR 15.5 billion – or EUR 7.45 per common share – on December 31, 2020.
Gross financial leverage
Gross financial leverage reduced by EUR 0.6 billion in the second half of 2020, leading to gross financial leverage of EUR 6.0 billion per December 31, 2020. This reduction was primarily driven by the previously announced repayment of USD 500 million senior debt maturing in December 2020, and a weakening of the US dollar against the Euro.
The gross financial leverage ratio improved from 28.4% on June 30, 2020 to 27.9% on December 31, 2020, as the reduction in leverage was partly offset by lower shareholders’ equity excluding revaluation reserves.
Cash Capital at Holding and Free Cash Flows
Aegon’s Cash Capital at Holding position decreased from EUR 1,706 million to EUR 1,149 million during the second half of the year, which is in the upper half of the operating range of EUR 0.5 billion to EUR 1.5 billion. Free Cash Flows to the Holding of EUR 140 million resulted from EUR 275 million gross remittances from the units and EUR 135 million holding funding and operating expenses. These covered the EUR 122 million dividends to shareholders.
The decrease in Cash Capital at Holding was driven by the repayment of USD 500 million senior debt (EUR 411 million) and EUR 175 million capital injections. These capital injections mainly related to the expansion of Aegon’s life and non-life insurance partnership with Banco Santander following its acquisition of Banco Popular.
Aegon’s Group Solvency II ratio increased from 195% to 196% during the second half of 2020, and the capital ratios of its three main units were above their respective operating levels at the end of 2020. Per December 31, 2020, the proposed final dividend 2020 of EUR 0.06 per common share has been deducted from the Group Solvency II ratio, which reduced the ratio by 1%-point. Capital generation after holding expenses amounted to EUR 223 million for the second half of 2020. Adverse market movements totaled EUR 217 million and were mainly driven by adverse credit spread movements. One-time items amounted to a negative EUR 433 million. This included the expansion of Aegon’s life and non-life insurance partnership with Banco Santander, and the inclusion of Aegon Bank in the calculation of the Group Solvency II ratio in accordance with industry-wide guidelines from the Dutch Central Bank. Other one-time items in the operating units largely offset each other. Normalized capital generation amounted to EUR 873 million, in line with the level in the second half of 2019.
The estimated RBC ratio in the United States increased to 432% on December 31, 2020, compared with 407% on June 30, 2020, and remained above the operating level of 400%. Market impacts had a positive impact on the RBC ratio, primarily from rising equity markets, while the adverse impact of rating migration and credit defaults was limited. Normalized capital generation had a positive impact on the RBC ratio. One-time items had a positive impact overall and included reduced required capital due to decreased hedge fund positions, and an adverse impact from setting up an accrual in relation to the ongoing rehabilitation process of a reinsurer. Finally, there was a downward impact from paying out dividends to the US holding company which was partially offset by the capital benefits as a result of the sale of the Pyramid complex.
The estimated Solvency II ratio of NL Life decreased to 159% on December 31, 2020, from 174% on June 30, 2020, and remained above the operating level of 150%. The decline was driven by Aegon’s decision to lower the factor applied when calculating the loss-absorbing capacity of deferred taxes (LAC-DT), increased investments in corporate credits, volatility in the separate account business, and by adverse market impacts. These were partly offset by a favorable impact from actuarial assumption changes. Aegon decided to lower the LAC-DT factor from 65% to 45% to reduce the sensitivity of this factor to economic variances going forward, and to take into account industry-wide Q&A and good practices recently published by the Dutch Central Bank. In the second half of 2020, cash was reallocated to corporate credits, which led to an initial capital strain, but is expected to improve capital generation going forward. The ratio was also adversely impacted by volatility in the separate account business. Adverse impacts of market movements were mainly driven by the impact from lower interest rates and equity markets. Actuarial assumption updates resulted in a positive impact from an update of mortality tables, further aligning them with Dutch industry practices, and a negative impact from an update of expense assumptions. Normalized capital generation had a positive impact, more than offsetting the EUR 25 million dividend payment to Group in the fourth quarter.
A change of the internal model to mitigate volatility caused by the basis risk between the EIOPA VA reference portfolio and Aegon’s own asset portfolio was implemented in the fourth quarter of 2020. This has reduced the impact from credit spread movements on the Solvency II ratio of the Dutch Life business. The internal model change is expected to remain in place until changes arising from the Solvency II review are enacted.
The estimated Solvency II ratio for Scottish Equitable PLC increased to 156% on December 31, 2020 from 145% on June 30, 2020, bringing it above the operating level of 150%. The increase was primarily driven by the update of the expense assumptions in the second half of 2020, reflecting the benefit of cost reduction initiatives. Furthermore, normalized capital generation had a positive impact.
The Core Tier-1 ratio of Aegon Bank declined from 21.5% per June 30, 2020 to 21.0% on December 31, 2020. Drivers include increased investments in mortgages, which led to higher required capital.
Final dividend 2020
Aegon aims to pay out a sustainable dividend to allow equity investors to participate in Aegon’s performance. The dividend can grow over time if Aegon’s performance so allows. At the Annual General Meeting of Shareholders on June 3, 2021, the Executive Board will, in the absence of unforeseen circumstances, propose a final dividend for 2020 of EUR 0.06 per common share. If approved, and in combination with the interim dividend of EUR 0.06 per share paid over the first half of 2020, Aegon’s total dividend over 2020 will amount to EUR 0.12 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 intends to neutralize the dilutive effect of the final 2020 stock dividend on earnings per share in the third quarter of 2021, barring unforeseen circumstances.
If the proposed dividend is approved by shareholders, Aegon’s shares will be quoted ex-dividend on June 7, 2021. The record date for the dividend will be June 8, 2021. The election period for shareholders will run from June 14 up to and including June 30, 2021. The stock fraction will be based on the average share price on Euronext Amsterdam from June 24 until June 30. The stock dividend ratio will be published on Aegon’s website on June 30, 2021, and the dividend will be payable as of July 7, 2021.