AEGON Withstands Market Turmoil With Continued Capital Strength and Resilient Franchise
THE HAGUE, The Netherlands, November 10, 2011 /PRNewswire/ --
- Underlying earnings before tax of EUR 361 million
- Compared with Q3 2010, earnings included the positive effect of updated assumptions (EUR 35 million) offset by effects of lower equity markets and interest rates (EUR 49 million), unfavorable currency movements
(EUR 32 million) and higher provisioning for longevity (EUR 24 million) - Fair value items recorded a loss of EUR 288 million
- Decision to lower interest rates assumptions resulted in charge of EUR 168 million
- Other fair value items recorded EUR 120 million in losses due to lower interest rates and equity markets, spread widening and increased volatility
- Hedging programs performed well; higher reserve requirements fully offset by hedging results
- Net income amounts to EUR 60 million
- Return on equity of 6.9%, or 8.1% excluding run-off businesses
- Strong gross deposits of EUR 10.5 billion; record net deposits* of EUR 4.4 billion
- Total sales increase 2% to EUR 1.6 billion as a result of strong deposits
- New life sales decline 18% to EUR 405 million due to product repricing following continued focus on margins
- Accident & health sales increase 5% to EUR 153 million mainly driven by the Americas
- Record deposits driven by pensions and variable annuities in the United States
- Capital position remains strong; cash flows impacted by lower interest rates
- Strong capital position demonstrated by IGD solvency ratio of ~190%
- Excess capital of EUR 3.4 billion, of which EUR 1.2 billion maintained at the holding - well above target
- Capital base ratio increases to 73.6% - on track to achieve ratio of at least 75% by the end of 2012
- Operational free cash flows of EUR (678) million; higher reserve requirements due to lower interest rates
Statement of Alex Wynaendts, CEO
"The challenging financial market conditions clearly impacted AEGON's earnings during the third quarter. Lower equity markets and the significant drop in interest rates, as well as a further weakening of the US dollar were the main drivers to the decline in underlying earnings. At the same time, AEGON's capital position remained strong and our franchise continues to be resilient. Despite the difficult environment, we achieved record net deposits in our key growth businesses.
"In light of the continued low interest rate environment, we have revised our long-term interest rate assumptions which had a one-time significant negative impact on net income. It is clear that the actions we have taken to strengthen our balance sheet have enabled us to withstand the extreme market volatility we have seen in recent months, while also continuing to grow our business. AEGON today is in a strong position, with a solid capital position and the right strategy that will allow us to pursue our long-term ambitions."
KEY PERFORMANCE
INDICATORS
amounts in EUR Q3 Q2 Q3 YTD YTD
millions b) Notes 2011 2011 % 2010 % 2011 2010 %
Underlying earnings
before tax 1 361 401 (10) 452 (20) 1,176 1,381 (15)
Net income 2 60 404 (85) 657 (91) 791 1,442 (45)
Sales 3 1,620 1,261 28 1,595 2 4,292 4,512 (5)
Value of new
business (VNB) 4 58 103 (44) 109 (47) 279 385 (28)
Return on equity 5 6.9% 8.1% (15) 9.3% (26) 7.4% 8.9% (17)
For notes see page 22.
* Excluding run-off businesses.
STRATEGIC HIGHLIGHTS
- Sale of closed UK life insurance business Guardian for a total consideration of GBP 275 million
- Restructuring of AEGON The Netherlands accelerated to reduce cost base by EUR 100 million
- Appointment of Simon Skinner as CEO of AEGON Ireland, AEGON's European variable annuity platform
Sustainable earnings growth with an improved risk-return profile
AEGON continues to implement its transformational program aimed at delivering sustainable earnings growth with an improved risk-return profile. The company set the following targets*:
- Grow underlying earnings before tax on average by 7%-10% per annum between 2010 and 2015;
- Achieve a return on equity of 10%-12% by 2015;
- Increase fee businesses to 30%-35% of underlying earnings before tax by 2015; and
- Increase normalized operational free cash flow by 30% by 2015.
AEGON's ambition
AEGON's ambition to be a leader in all of its chosen markets by 2015 is supported by four strategic objectives: Optimize portfolio, Enhance customer loyalty, Deliver operational excellence and Empower employees. These key objectives have been embedded in all AEGON businesses and provide the strategic framework for the company's ambition to become the most-recommended life insurance and pension provider by customers and distributors, as well as the most-preferred employer in the sector.
AEGON's AMBITION
To be a leader in all our chosen markets by 2015
AEGON'S STRATEGIC PRIORITIES
- Optimize portfolio
- Enhance customer loyalty
- Deliver operational excellence
- Empower employees
Optimize portfolio
In line with its strategic objective to optimize its portfolio of businesses, AEGON has decided to sell its UK-based Guardian life and pension business to Cinven, a European private equity group.
Guardian, which manages over 300,000 life insurance policies, has been closed to new business since
2001 and was sold for a total cash consideration
of GBP 275 million, equivalent to approximately one time book value. AEGON Asset Management has entered into a long-term agreement with Cinven and will continue to manage the assets of Guardian which total GBP 7.4 billion. The transaction is expected to close in the fourth quarter of 2011.
In China, AEGON's joint-venture with CNOOC opened its 10th regional branch in Fujian province, increasing its potential customer base to over 500 million people. AEGON-CNOOC is ranked among
the top ten foreign insurance companies in China.
In Spain, AEGON is positioning itself to grow with some of its current partners and terminate its relationship with others. Recently, AEGON has closed an agreement with one of the Banca Cívica partnering savings banks, Caja Burgos, and has launched an exit process from its alliance with Caja de Ahorros
del Mediterráneo (CAM), which has led to an arbitration process. AEGON will closely monitor
the course of events regarding other bancassurance partners in Spain.
Enhance customer loyalty
AEGON's net promoter score (NPS) program is being rolled out across the group and brings the company closer to its goal of integrating NPS in many of its businesses and enhancing customer loyalty. Approximately half of AEGON's businesses have begun using the program to gain direct customer feedback, respond to insights and adapt processes. Plans are in place to further increase the number of business units using NPS by the end of 2012 to support the company in its ambition of becoming the most recommended provider in the sector.
* Main economic assumptions embedded in targets: annual gross equity market return of 9%, 10 year US interest rate of 5.25% in 2015 and EUR/USD rate of 1.35.
Deliver operational excellence
AEGON announced plans to make its business in the Netherlands more agile and better positioned to respond to changing conditions and opportunities in the Dutch market. The restructuring of AEGON's Dutch business is an acceleration of previously announced strategic plans. Restructuring charges of EUR 60 million are included in the third quarter 2011 earnings. The reorganization program and other initiatives will result in reducing the cost base for AEGON The Netherlands by EUR 100 million, compared to the cost base for 2010. The majority of the cost savings are expected to be achieved in 2012.
In the United Kingdom, AEGON is on track to implement a new operating model aimed at reducing costs by 25% by the end of this year. The program to restructure the business aims to deliver GBP 80 million in expense savings of which to date GBP 71 million has been implemented.
In India, AEGON Religare instituted automated underwriting and risk analysis. The new system improves turn-around time, minimizes human mistakes, cultivates efficiency and contributes to reduced implementation and recurring costs. The business won an award for companies that demonstrate strategic and operational excellence in information technology.
FINANCIAL
OVERVIEW c)
EUR millions
YTD YTD
Notes Q3 2011 Q2 2011 % Q3 2010 % 2011 2010 %
Underlying earnings before tax
Americas 310 325 (5) 355 (13) 982 1,090 (10)
The Netherlands 68 74 (8) 97 (30) 223 298 (25)
United Kingdom 9 10 (10) 28 (68) 31 78 (60)
New markets 43 59 (27) 55 (22) 159 141 13
Holding and
other (69) (67) (3) (83) 17 (219) (226) 3
Underlying earnings
before tax 361 401 (10) 452 (20) 1,176 1,381 (15)
Fair value
items (288) (23) - 204 - (396) 191 -
Realized gains /
(losses) on
investments 102 204 (50) 129 (21) 397 403 (1)
Impairmen
charges (132) (100) (32) (92) (43) (294) (319) 8
Other income /
(charges) (54) (16) - (14) - (73) (51) (43)
Run-off
businesses (5) 10 - (7) 29 27 (35) -
Income before
tax (16) 476 - 672 - 837 1,570 (47)
Income tax 76 (72) - (15) - (46) (128) 64
Net income 60 404 (85) 657 (91) 791 1,442 (45)
Net income / (loss)
attributable to:
Equity holders of AEGON
N.V. 60 403 (85) 657 (91) 790 1,441 (45)
Non-controlling
interests - 1 - - - 1 1 -
Net underlying
earnings 308 339 (9) 374 (18) 980 1,069 (8)
Commissions and
expenses 1,575 1,500 5 1,525 3 4,588 4,486 2
of which
operating
expenses 11 886 847 5 835 6 2,570 2,488 3
New life sales
Life single
premiums 1,073 1,189 (10) 1,650 (35) 3,988 5,491 (27)
Life recurring
premiums
annualized 298 312 (4) 329 (9) 938 1,002 (6)
Total recurring plus
1/10 single 405 431 (6) 494 (18) 1,337 1,551 (14)
New life sales
Americas 12 110 104 6 138 (20) 327 379 (14)
The Netherlands 32 40 (20) 32 - 137 135 1
United Kingdom 199 217 (8) 264 (25) 663 837 (21)
New markets 12 64 70 (9) 60 7 210 200 5
Total recurring plus
1/10 single 405 431 (6) 494 (18) 1,337 1,551 (14)
New premium production
accident and health
insurance 153 145 6 146 5 457 442 3
New premium production
general insurance 12 14 (14) 14 (14) 39 43 (9)
Gross deposits (on and off
balance)
Americas 12 7,376 5,014 47 4,705 57 18,019 15,261 18
The Netherlands 584 442 32 525 11 1,488 1,892 (21)
United
Kingdom 11 17 (35) 16 (31) 47 71 (34)
New markets 12 2,525 1,242 103 4,161 (39) 5,034 7,541 (33)
Total gross
deposits 10,496 6,715 56 9,407 12 24,588 24,765 (1)
Net deposits (on and off
balance)
Americas 12 2,840 426 - 545 - 3,033 1,838 65
The Netherlands 54 (113) - (83) - (174) 39 -
United Kingdom 1 14 (93) 2 (50) 17 41 (59)
New markets 12 1,502 (2,487) - 3,293 (54) (2,704) 3,601 -
Total net deposits
excluding run-off
businesses 4,397 (2,160) - 3,757 17 172 5,519 (97)
Run-off
businesses (1,121) (527) (113) (1,091) (3) (2,528) (5,150) 51
Total net
deposits 3,276 (2,687) - 2,666 23 (2,356) 369 -
REVENUE-GENERATING INVESTMENTS
Sept. June
30, 30,
2011 2011 %
Revenue-generating
investments (total) 404,254 391,276 3
Investments general
account 143,006 132,837 8
Investments for account
of policyholders 139,599 142,672 (2)
Off balance sheet
investments third
parties 121,649 115,767 5
OPERATIONAL HIGHLIGHTS
Underlying earnings before tax
AEGON's underlying earnings before tax declined
to EUR 361 million in the third quarter. The 20% decline, compared with the same quarter last year, was mainly due to lower interest rates and equity markets, unfavorable currency exchange rate movements and higher provisioning for longevity.
Underlying earnings from the Americas decreased to EUR 310 million. Consistent with AEGON's strategy, earnings from fee-based businesses grew compared with the third quarter last year. However, they were more than offset by a weaker US dollar against the euro and lower earnings from fixed annuities as this line of business is de-emphasized. Earnings included the positive effect of updated assumptions of EUR 35 million mainly related to mortality.
In the Netherlands, underlying earnings decreased to EUR 68 million as a result of higher provisioning for longevity of EUR 24 million and investments in developing new distribution capabilities of EUR 5 million.
In the United Kingdom, underlying earnings declined to EUR 9 million. The third quarter included costs of EUR 14 million related to an ongoing program to correct historical issues within customer policy records and investments in developing new propositions (EUR 3 million). The company is on track to finalize the program in the fourth quarter of 2011.
In addition, earnings of Guardian, the recently
sold closed book of life insurance business, were
no longer reflected in underlying earnings (EUR 6 million).
Underlying earnings from New Markets decreased to EUR 43 million, mainly as a result of lower earnings from Central & Eastern Europe due to lower investment income and the negative impact from pension legislation changes. In addition, the comparable quarter last year included a one-time benefit of EUR 5 million from Variable Annuities Europe.
Total holding costs amounted to EUR 69 million
as net interest results were higher than in the comparable quarter a year ago.
Net income
Net income decreased to EUR 60 million due mainly to a significant decline in results on fair value items.
Fair value items
To reflect current market circumstances, AEGON
has lowered its long-term assumption for 10-year
US Treasury yields by 50 bps to 4.75% (graded uniformly from current yields over the next five years) and lowered the 90-day rate to 0.2% for the next two years followed by a three year grade to 3%. No change has been made to the long-term credit spread or default assumptions. In addition, AEGON has lowered its assumed return for separate account bond fund returns by 200 bps to 4% over the next five years, followed by a return of 6% thereafter. The bond fund return is a gross assumption from which asset management and policy fees are deducted to determine the policyholder return. In total, these assumption changes led to a charge of EUR 168 million. In addition, lower interest rates, spread widening and lower equity markets affected other fair value items which resulted in losses of EUR 120 million. In total, fair value items recorded a loss of EUR 288 million during the third quarter.
Realized gains on investments
In the third quarter, realized gains on investments amounted to EUR 102 million and were the result of normal trading in the investment portfolio and the divestment of the life reinsurance activities.
Impairment charges
Impairment charges amounted to EUR 132 million. In the United States, impairments of EUR 76 million were linked to residential mortgage-backed securities and in the United Kingdom to financial holdings of Portuguese and Greek banks (EUR 22 million). Impairments in New Markets of EUR 29 million were largely attributable to the effect of new legislation in Hungary, related to Swiss franc denominated mortgages, affecting the mortgage portfolio.
Other charges
Other charges amounted to EUR 54 million and are mostly related to restructuring provisions in the Netherlands (EUR 60 million) and in the United Kingdom (EUR 15 million). These charges are partly offset by UK policyholder tax with an equal and opposite charge in the tax income line of EUR 20 million.
Run-off businesses
The results of run-off businesses amounted to a loss of EUR 5 million as a lower amortization yield paid on internally transferred assets related to the institutional spread-based business and favorable mortality results for pay-out annuities were offset by lower results from BOLI/COLI and transaction costs related to the divestment of the life reinsurance activities.
Income tax
Net income for the quarter contained a tax benefit of EUR 76 million. A benefit of EUR 46 million in the United States related to the utilization of losses for which previously no deferred tax asset was recognized. In the United Kingdom, a benefit of EUR 24 million was recorded as a result of the tax rate reduction as per April 2012, enacted in July 2011.
Return on equity
In the first nine months of 2011, the return on equity of AEGON's ongoing business amounted to 8.7%.
Including capital allocated to the run-off businesses, return on equity amounted to 7.4%.
Operating expenses
In the third quarter, operating expenses increased 6% to EUR 886 million due mainly to higher restructuring charges. Excluding restructuring charges, employee benefit plans and at constant currencies, operating expenses increased 1% during the first nine months of 2011.
Sales and deposits
AEGON's total sales increased 2% to EUR 1.6 billion mainly as a result of strong pension deposits. New life sales declined, mainly as a result of lower single premium production in the United Kingdom and the Americas following repricing of products, partly offset by growth in Central & Eastern Europe.
Gross deposits of EUR 10.5 billion were supported by increased pension and variable annuity deposits in the United States and continued strong third-party asset management inflows.
Value of new business
Compared with the third quarter 2010, the value of new business declined considerably to EUR 58 million, reflecting current market circumstances of lower interest rates and higher volatility and lower new life sales partly offset by higher deposits. AEGON prices its products on an economic framework basis and will start to publish value of new business on that basis as of the first quarter of 2012.
Revenue-generating investments
Revenue-generating investments rose 3% compared with the end of the second quarter of 2011 to
EUR 404 billion. The positive effect of strong inflows and lower interest rates on asset balances was only partly offset by the effect of lower equity markets.
Capital management
In August, Standard & Poor's positively revised their outlook on AEGON and its subsidiaries to stable from negative and affirmed the 'AA-' ratings on the core operating entities. At the same time, Moody's affirmed the A3 senior debt of AEGON and upgraded the subordinated rating of AEGON to Baa1 from Baa2. Moody's also upgraded the outlook on all ratings to stable from negative. In the opinion of the rating agencies, AEGON's balance sheet is more resilient to stress as a result of an improved risk profile. In addition, AEGON delivered on its strategy with the
full repayment to the Dutch State in June 2011 and the divestment of its life reinsurance activities in August 2011.
AEGON's core capital, excluding revaluation reserves, amounted to EUR 16.9 billion, equivalent to 73.6%[6] of the company's total capital base at the end of the third quarter. AEGON aims the proportion of core capital to be at least 75% of total capital by the end of 2012.
Shareholders' equity increased to EUR 19.4 billion as a result of the appreciation of the US dollar against the euro and a significant increase in the revaluation reserves during the third quarter. Shareholders' equity per common share, excluding preference capital, amounted to EUR 9.21 at September 30, 2011.
The revaluation reserves at September 30, 2011 increased to EUR 2.6 billion, mainly the result of a significant decrease in risk-free interest rates which had a positive effect on the value of fixed income securities, partly offset by spread widening. In addition, the foreign currency translation reserves improved, primarily the result of a strengthening of the US dollar against the euro.
AEGON aims to maintain at least 1.5 times holding expenses as a buffer at the holding, currently equivalent to approximately EUR 900 million. During the third quarter, excess capital in the holding increased to EUR 1.2 billion as a result of dividends received from business units.
At September 30, 2011, AEGON's Insurance Group Directive (IGD) ratio amounted to ~190%, a decrease from the level of ~200% at the end of the second quarter.
Full version
Cash flows
AEGON aims to deliver sustainable cash flows and has announced its intention to improve operational free cash flow from its 2010 normalized level of
EUR 1.0-1.2 billion per annum by 30% by 2015.
AEGON posted negative operational free cash flows of EUR 678 million during the third quarter of 2011. Operational free cash flows were severely affected in the United States as a result mainly of the sharp decline in interest rates. Excluding the impact of financial markets in the third quarter, operational free cash flows totaled EUR 397 million. Operational free cash flows represent distributable earnings generation of the business units. The impact of capital preservation initiatives or proceeds from disposals are not included in the reported operational free cash flows.
The full version of this release is available at http://www.aegon.com/en/Home/Investors/Quarterly-results/.
ADDITIONAL INFORMATION
The Hague, November 10, 2011
Press conference call
7:45 am CET: Audio webcast on http://www.aegon.com
Analyst & investor presentation / conference call
9:00 am CET: Audio webcast on http://www.aegon.com
Call-in numbers
United States: +1-480-629-9673
United Kingdom: +44-207-153-2027
The Netherlands: +31-45-631-6902
Replay
Two hours after the conference call, a replay will be available on http://www.aegon.com and on the following phone numbers:
United Kingdom: +44-207-154-2833, access code: 4481413#
United Sates: +1-303-590-3030, access code: 4481413#
Supplements
AEGON's Q3 2011 Financial Supplement and Condensed Consolidated Interim Financial Statements are available on http://www.aegon.com.
About AEGON
As an international life insurance, pension and asset management company based in The Hague, AEGON has businesses in over twenty markets in the Americas, Europe and Asia. AEGON companies employ approximately 26,000 people and have some 40 million customers across the globe.
Third Full
Third quarter quarter year
Key figures - EUR 2011 Full year 2010 2010 2009
Underlying earnings
before tax 361 million 1.8 billion 473 million 1.2 billion
New life sales 405 million 2.1 billion 527 million 2.1 billion
Gross deposits 10.5 billion 33 billion 9.4 billion 28 billion
Revenue-generating
investments (end of
period) 404 billion 413 billion 405 billion 363 billion
DISCLAIMERS
Cautionary note regarding non-GAAP measures
This document includes certain non-GAAP financial measures: underlying earnings before tax and value of new business. The reconciliation of underlying earnings before tax to the most comparable IFRS measure is provided in Note 3 "Segment information" of our Condensed consolidated interim financial statements. Value of new business is not based on IFRS, which are used to report AEGON's primary financial statements and should not be viewed as a substitute for IFRS financial measures. We may define and calculate value of new business differently than other companies. Please see AEGON's Embedded Value Report dated May 12, 2011 for an explanation of how we define and calculate value of new business . AEGON believes that these non-GAAP measures, ogether with the IFRS information, provide a meaningful measure for the investment community to evaluate AEGON's business relative to the businesses of our peers.
Local currencies and constant currency exchange rates
This document contains certain information about our results and financial condition in USD for the Americas and GBP for the United Kingdom, because those businesses operate and are managed primarily in those currencies. Certain comparative information presented on a constant currency basis eliminates the effects of changes in currency exchange rates. None of this information is a substitute for or superior to financial information about us presented in EUR, which is the currency of our primary financial statements.
Forward-looking statements
The statements contained in this document that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. The following are words that identify such forward-looking statements: aim, believe, estimate, target, intend, may, expect, anticipate, predict, project, counting on, plan, continue, want, forecast, goal, should, would, is confident, will, and similar expressions as they relate to our company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. We undertake no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which merely reflect company expectations at the time of writing. Actual results may differ materially from expectations conveyed in forward-looking statements due to changes caused by various risks and uncertainties. Such risks and uncertainties include but are not limited to the following:
- changes in general economic conditions, particularly in the United States, the Netherlands and the United Kingdom;
- changes in the performance of financial markets, including emerging markets, such as with regard to:
- the frequency and severity of defaults by issuers in our fixed income investment portfolios; and
- the effects of corporate bankruptcies and/or accounting restatements on the financial markets and the resulting decline in the value of equity and debt securities we hold;
- the frequency and severity of insured loss events;
- changes affecting mortality, morbidity, persistence and other factors that may impact the profitability of our insurance products;
- changes affecting interest rate levels and continuing low or rapidly changing interest rate levels; changes affecting currency exchange rates, in particular the EUR/USD and EUR/GBP exchange rates;
- changes in the availability of, and costs associated with, liquidity sources such as bank and capital markets funding, as well as conditions in the credit markets in general
- increasing levels of competition in the United States, the Netherlands, the United Kingdom and emerging markets;
- changes in laws and regulations, particularly those affecting our operations, the products we sell, and the attractiveness of certain products to our consumers;
- regulatory changes relating to the insurance industry in the jurisdictions in which we operate;
- acts of God, acts of terrorism, acts of war and pandemics;
- changes in the policies of central banks and/or governments;
- lowering of one or more of our debt ratings issued by recognized rating organizations and the adverse impact such action may have on our ability to raise capital and on our liquidity and financial condition;
- lowering of one or more of insurer financial strength ratings of our insurance subsidiaries and the adverse impact such action may have on the premium writings, policy retention, profitability of its insurance subsidiaries and liquidity;
- the effect of the European Union's Solvency II requirements and other regulations in other jurisdictions affecting the capital we are required to maintain;
- litigation or regulatory action that could require us to pay significant damages or change the way we do business;
- customer responsiveness to both new products and distribution channels;
- competitive, legal, regulatory, or tax changes that affect the distribution cost of or demand for our products;
- the impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including our ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions;
- our failure to achieve anticipated levels of earnings or operational efficiencies as well as other cost saving initiatives.
Further details of potential risks and uncertainties affecting the company are described in the company's filings with Euronext Amsterdam and the US Securities and Exchange Commission, including the Annual Report on Form 20-F. These forward-looking statements speak only as of the date of this document. Except as required by any applicable law or regulation, the company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Contact information
Media relations:
Greg Tucker
+31(0)70-344-8956
[email protected]
Investor relations:
Willem van den Berg
+31-(0)70-344-8305
877-548-9668 - toll free USA only
[email protected]
SOURCE AEGON N.V.
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