Aegon Swings to Profit - Analyst Blog

Dutch insurer Aegon NV (AEG) reported second quarter net income of €413 million (US$538 million), which came in substantially ahead of the net loss of €161 million (US$210 million) in the year-ago quarter. The momentous swing was primarily due to improved earnings, realized gains on investments, increased deposits and lower impairments.

Aegon's underlying earnings before tax amounted to €522 million, compared with €415 in the year-ago quarter. This was primarily driven by improved financial markets and strengthening of the U.S. dollar. Earnings increased year over year with growth witnessed across the U.S. and U.K., partially offset by a decline in The Netherlands and new markets. On a constant currency basis, operating expenses decreased by 2% year over year to €830 million as a result of significant cost savings due to the Aegon's cost-cutting initiatives taken up in 2009.

New life sales increased 22% year over year to €590 million. However, value of new business declined 18% year over year to €148 million, primarily due to a decrease in risk assets in the U.K. and lower fixed annuity sales in the U.S.

Revenue-generating investments rose to €409 billion at the end of June 2010, up 5% from the first quarter. The increase was mainly the result of a further rise in equity markets and a stronger U.S. dollar at the end of the reported quarter. Gross deposits totaled €7.6 billion, up 16% year over year, while net deposits remained strong at €1.0 billion.

Financial Update

As of June 30, 2010, core capital, excluding the revaluation reserves, amounted to €18.6 billion or 74% of the total capital base, well above Aegon's self-imposed minimum target of 70%. The revaluation reserves amounted to a positive €588 million due to increase in value of fixed income securities.

As of June 30, 2010, the Insurance Group Directive capital surplus totaled €7.0 billion, equivalent to a solvency ratio of 200%. Return on equity improved to 9.7% from 9.4% in the year-ago period, while Aegon's internal rate of return stood firmly at 18.0%. These factors reflect a strong capital position.

Business Update

During the reported quarter, Aegon continued to diminish its exposure to the peripheral European sovereign bonds by selling approximately €450 million in Spanish government bonds, thereby reducing it to a market value of €1.5 billion as of June 30, 2010.

Of late, Aegon is engaged in the process of seeking the European Commission's final assent to the terms relating to Aegon's participation in the capital support program of the Dutch State. A final decision is expected in the near future.

Ratings Update

During the reported quarter, the financial strength ratings of Aegon's U.S. operating companies were upgraded by A.M. Best to "A+", reflecting a stable outlook of the parent company. However, in July 2010, Fitch Ratings lowered Aegon's financial strength ratings to "AA-", but raised the outlook to stable.

Aegon received state aid of €3 billion during the peak of the financial crisis and has so far repaid €1 billion. As a result, the company is aiming to maintain a substantial cash buffer. In addition, Aegon is attempting to harness its operating efficiency by focusing on its core operations, such as life insurance, pension and asset management, and is also seeking for strategic options for its Transamerica Reinsurance business that could even include a sale.

Additionally, Aegon is also making vigorous efforts to restructure its U.K. business to improve returns, and projects cost reductions of about 25% by the end of 2011. Aegon continues to work on its long term strategic priorities to reallocate capital toward business with higher growth and good return prospects, in order to improve growth and returns from its existing businesses and to reduce financial market risk.

 
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