Aegon : reports second quarter 2015 results

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Aegon's underlying earnings before tax in the second quarter of 2015 increased by 7% to EUR 549 million. Favorable currency movements (EUR 86 million), growth in variable annuity and pension balances in the United States and asset management balances (EUR 34 million) more than offset the reduction in recurring earnings resulting from the assumption changes and model updates implemented in the United States in the third quarter of 2014 (EUR 25 million), lower earnings from fixed annuities (EUR 13 million) and divestments (EUR 14 million).

Underlying earnings from the Americas were up by 8% to EUR 358 million. In US dollars, underlying earnings decreased by 13%. The positive impact on earnings from growth in variable annuity and pension balances was more than offset by the recurring earnings reduction from the assumption changes and model updates implemented in the third quarter of 2014, lower earnings from fixed annuities and the divestment of Canada. The quarter included adverse mortality of EUR 17 million.

In the Netherlands, underlying earnings increased by 4% to EUR 136 million, as favorable mortality and one-time items were partly offset by higher non-life claims and lower investment income.

Underlying earnings from Aegon's operations in the United Kingdom were up 9% to EUR 34 million in the second quarter of 2015, mainly as a result of favorable currency movements.

Underlying earnings from New Markets were stable at EUR 62 million. Higher asset management and performance fees offset lower earnings in other markets and the divestment of Aegon's stake in
La Mondiale Participations.

Total holding costs remained flat at EUR 41 million.

Net income slightly increased to EUR 350 million. Higher underlying earnings and lower taxes were offset by a higher loss on fair value items and lower realized gains.

The loss from fair value items amounted to EUR 293 million. This loss was mainly driven by hedging programs in the United States and the Netherlands and alternative investments, which more than offset a gain on interest rate swaps on perpetuals at the holding of EUR 118 million as a result of higher interest rates. The loss in the Netherlands was driven by hedge ineffectiveness, which was only partly offset by the benefit from higher interest rates and credit spreads.

Realized gains on investments amounted to EUR 134 million. These were primarily related to portfolio rebalancing in the Netherlands in a low rate environment.

Gross impairments remained low as a result of the favorable credit environment. This, in combination with net recoveries, led to a positive result of EUR 7 million in the second quarter of 2015.

Other charges amounted to EUR 11 million, the result of charges for policyholder taxes in the United Kingdom which were offset by an equal amount in the income tax line.

The result from run-off businesses improved to EUR 3 million.

Income tax amounted to EUR 39 million in the second quarter, driven by tax benefits in the United States and the United Kingdom. The effective tax rate on underlying earnings was 21%, impacted favorably by tax credits related to solar energy investments in the United States.

Return on equity was 8.2% in the second quarter of 2015, lower than prior year due to higher shareholders' equity. Return on equity for Aegon's ongoing businesses, excluding the capital allocated to the run-off businesses, amounted to 8.9% over the same period.

In the second quarter, operating expenses increased by 14% to EUR 923 million, driven by a stronger US dollar, higher investments in technology-related initiatives and project related expenses. At constant currencies, the increase was 2%.

Aegon's total sales were up 18% to EUR 2.4 billion in the second quarter of 2015, the result of a stronger US dollar, higher asset management deposits and increased indexed universal life sales.

Gross deposits increased by 29%, driven by higher deposits in Aegon Asset Management and strong growth in bank deposits in the Netherlands. Net deposits, excluding run-off businesses, declined to EUR 3.3 billion. This was due to lower net inflows in Aegon Asset Management and lower net inflows in variable annuities, as a result of the successful enhanced alternative lump sum offer for the legacy GMIB block.

New life sales were up 1% to EUR 518 million, as higher indexed universal life sales in the United States and favorable currency movements more than offset lower sales in the Netherlands and United Kingdom. New premium production for accident & health and general insurance was down slightly to EUR 248 million, as the effect of a stronger US dollar was more than offset by lower portfolio takeovers in the United States.

The market consistent value of new business amounted to EUR 183 million. The positive effect of currency movements and product adjustments in the United States was more than offset by the negative impact of lower interest rates.

Revenue-generating investments increased by 1% during the second quarter of 2015 to EUR 645 billion. This increase was driven by the acquisition of the 25% stake in La Banque Postale Asset Management and net inflows, which more than offset the unfavorable effect of market movements resulting from higher interest rates on the fixed income portfolio.

Shareholders' equity declined EUR 2.4 billion compared with the end of the first quarter of 2015 to EUR 25.0 billion on June 30, 2015. This was mainly caused by higher interest rates, which resulted in lower revaluation reserves on fixed income portfolios.

The revaluation reserves were down by EUR 2.7 billion to EUR 7.2 billion. Aegon's shareholders' equity, excluding revaluation reserves and defined benefit plan remeasurements, declined to EUR 19.3 billion - or EUR 9.09 per common share - at the end of the second quarter. This was driven by unfavorable currency movements and the payment of the final dividend for 2014, which more than offset net income generated during the quarter.

The gross leverage ratio further improved to 27.7% in the second quarter, well within the target range of 26-30%, driven by earnings generated in the quarter, net of the payment of the final dividend. Excess capital in the holding increased to EUR 1.5 billion.

Dividends of EUR 0.6 billion paid to the holding by the United States were largely offset by the payment of the final dividend for 2014, the investment in La Banque Postale Asset Management, interest payments, the effect of currency hedges and operating expenses.

Aegon's Insurance Group Directive (IGD) solvency ratio declined to 206% in the second quarter, mainly driven by negative market impacts. The capital in excess of the S&P AA threshold in the United States declined to USD 1.0 billion, due to dividends paid to the holding and negative market impacts. In the Netherlands, the IGD ratio, excluding Aegon Bank, declined to ~225%, driven by adverse market impacts. The Pillar I ratio in the United Kingdom, including the with-profit fund, remained stable at ~135%.

Aegon has obtained more clarity from the regulator on a number of items regarding Solvency II, which include amongst others volatility adjuster modelling in the Netherlands, use of matching adjustment in the United Kingdom and calibration of the US RBC ratio conversion at 250%. As a result, the company expects its Solvency II ratio to be in a tightened range of 140% to 170%, as there are still uncertainties remaining. Furthermore, Aegon has applied for the use of its internal model and is currently awaiting regulatory approval.

Operational free cash flows excluding market impacts and one-time items amounted to EUR 388 million in the second quarter of 2015. The one-time items of EUR 256 million were primarily related to tax benefits arising from the re-domestication of a block of variable annuity business to the United States. Negative market impacts amounted to EUR 677 million and were mainly the result of interest rate mismatches and hedge losses in the Netherlands and the United States. Operational free cash flows including market impacts and one-time items amounted to a negative EUR 34 million for the quarter.

Aegon aims to pay out a sustainable, growing dividend, in line with the growth of its cash flows. This policy is reflected in the increase of the 2015 interim dividend to EUR 0.12 per common share. The interim dividend will be paid in cash or stock at the election of the shareholder. The value of the stock dividend will be approximately equal to the cash dividend. Aegon will neutralize the dilutive effect of the stock dividend on earnings per share.

Aegon's Euronext-listed shares will be quoted ex-dividend on August 21, 2015, whereas its NYSE-listed shares will be quoted ex-dividend on August 20, 2015. The record date is August 24, 2015. The election period for shareholders will run from August 26 up to and including September 11, 2015. The stock fraction will be based on the average share price on Euronext Amsterdam from September 7 through September 11, 2015. The stock dividend ratio will be announced on September 15, 2015 and the dividend will be payable as of September 18, 2015.