Dutch insurer Aegon NV (AEG) reported fourth quarter net income of €318 million (US$438 million), which was substantially below the net income of €393 million (US$541 million) in the year-ago quarter. In fiscal 2010, net income jumped to €1.76 billion as opposed to €204 million in 2009.
The momentous swing was primarily due to improved underlying earnings and lower impairments. These were partially offset by lower realized gains and restructuring charges in U.S.
Aegon’s underlying earnings before tax amounted to €489 million compared with €478 in the year-ago quarter. This was primarily driven by improved financial markets and strengthening of the U.S. dollar. Net underlying earnings increased year over year with growth witnessed across the U.S. and New Markets, partially offset by decline in The Netherlands and U.K.
Operating expenses increased by 8% year over year to €909 million as a result of strengthening of the dollar and pound sterling against the euro. However, operating expenses declined 2% during 2010, excluding currency effects, restructuring and U.S. employee benefit plan charges.
New life sales marginally increased to €558 million in the quarter from €557 million in the prior-year quarter. However, new life sales climbed 5% year over year to €2.21 billion in 2010 as against €2.10 billion in 2009.
Value of new business in the reported quarter declined 35% year over year to €141 million, and 28% year over year to €555 million in 2010 primarily as a result of the strategic shift from spread to fee business. Low margins in U.S. and U.K. also contributed to the decline, whereas the lower margins in The Netherlands were offset by the positive effect of higher pension sales.
Revenue-generating investments rose to €413 million at the end of December 31, 2010, from €405 million in the prior quarter, primarily as a result of higher equity markets. Gross deposits, excluding run-off businesses, totaled €7.8 billion, up 16% year over year driven by U.S. pensions, variable annuities and Aegon Asset Management.
Financial Update
At the end of the fourth quarter, core capital, excluding the revaluation reserves, amounted to €17.8 billion or 75% of the total capital base, well above Aegon’s self-imposed minimum target of 70%. Management aims to increase this minimum target to at least 75% by the end of 2012.
The revaluation reserves amounted to €1.0 billion, which declined from the prior-year quarter due to increase in risk-free interest rates negatively effecting the value of fixed income securities.
As of December 31, 2010, shareholders’ equity decreased to €17.2 billion compared to €18.0 billion in the prior quarter, while the Insurance Group Directive’s solvency ratio was 198%. Return on equity improved to 9.9% from 9.4% in the reported quarter, with 2010 return on equity of 9.8% as compared with 5.7% in the year-ago period.
These factors reflect a strong excess capital position, which improved to €3.8 billion, with excess capital in the holding of €1.7 billion.
Repurchases
Aegon completed a 10% equity issue via an accelerated book-built offering on February 24. The issue was conducted under Aegon’s U.S. Shelf Registration through the sale of 173,604,912 new common shares of the company with a nominal value of €0.12. The shares were sold at a price of €5.20 per share.
The proceeds of €903 million will be used to fund part of the repurchase of 375 million convertible core capital securities provided by the Dutch State.
Application has been made to list the new shares on Euronext Amsterdam, the principal market for Aegon’s shares. The issue is expected to be settled on March 1, 2011 and the new shares are expected to be admitted to trading as of that date.
Dutch Loan Update
In August 2010, Aegon received the European Commission’s final assent to the terms relating to Aegon’s participation in the capital support program and also paid back €500 million to the Dutch State. Aegon received state aid of €3 billion during the peak of the financial crisis and has so far repaid €1.5 billion.
As a result, the company is aiming to maintain a substantial cash buffer. Aegon has agreed with its regulator, the Dutch Central Bank, that in the current environment it will maintain a capital buffer of 1.5 times its annual holding expenses.
Restructuring Update
Consolidation of Aegon’s asset management operations led to a €12 million restructuring charge. A restructuring program is ongoing in the U.K. to achieve a 25% cost reduction by the end of 2011. This led to a charge of €6 million in the fourth quarter.
In Hungary, unfavorable pension legislation changes resulted in a write-down of intangibles of €18 million and a €5 million restructuring charge related to the Hungarian pension operations. In addition, a bank tax in Hungary led to a charge of €5 million.
Overall, Aegon is attempting to harness its operating efficiency by focusing on its core operations such as life insurance, pension and asset management. In addition, Aegon is well on track with its transformational process and aims to deliver sustainable earnings growth with an improved risk-return profile.
The company thus expects to grow underlying earnings before tax on average by 7%-10% per annum and achieve a return on equity of 10%-12% in the medium term. Aegon also expects to increase fee businesses to 30% to 35% of underlying earnings before tax by 2015.
In addition, the company expects to increase normalized operational free cash flow with 30% by 2015 and intends to resume dividend payments with a dividend of €0.10 per share related to 2H11 in May 2012.
Also, Aegon continues to work on its long-term strategic priorities to reallocate capital toward business with higher growth and good return prospects, to improve growth and returns from its existing businesses and to reduce financial market risk.
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