Aegon Profit Jumps - Analyst Blog

Dutch insurer Aegon NV (AEG) reported third quarter net income of €657 million (US$905 million), which came in substantially ahead of €145 million (US$200 million) recorded in the year-ago quarter.

The momentous swing was primarily due to improved underlying earnings, higher realized gains, new life sales, increased deposits and lower impairments. These were partially offset by decline in value of new businesses and revenue generating investments.

Aegon's underlying earnings before tax amounted to €473 million compared with €390 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 U.K., partially offset by decline in Netherlands and flattish growth in new markets.

On a constant currency basis, operating expenses decreased by 1% year over year to €835 million as a result of significant cost savings due to the Aegon's cost-cutting initiatives that were adopted in 2009, partially offset by investments in new markets.

During the reported quarter, total revenue increased 9.2% year over year to €7.7 billion. New life sales increased 7% year over year to €527 million. However, value of new business declined 29% year over year to €120 million, primarily due to lower sales and decrease in margins in U.K., U.S. and Netherlands.

Revenue-generating investments rose to €405 billion at the end of September 2010, marginally dipping from €409 billion in the prior quarter, primarily due to weaker U.S. dollar against the euro. Gross deposits, excluding run-off businesses, totaled to €9.4 billion, up 38% year over year due to strong third-party asset management deposits.

Financial Update

As of September 30, 2010, core capital, excluding the revaluation reserves, amounted to €17.2 billion or 74% of the total capital base, well above Aegon's self-imposed minimum target of 70%. Management aims to increase this minimum target to 75% by 2012. The revaluation reserves amounted to €2.3 billion due to increase in value of fixed income securities.

At the end of the reported quarter, Aegon's total assets were €337 billion against €291.7 billion at the end of the year-ago quarter. Shareholders' equity increased to €18 billion compared to €11.6 billion in the year-ago quarter. The debt-to-capital ratio improved to 6% from 7% in the prior quarter.

As of September 30, 2010, the Insurance Group Directive's solvency ratio was 205%, while return on equity improved to 10.0% from 4.6% in the year-ago period. These factors reflect a strong excess capital position, which improved to €3.3 billion, even after a €500 million debt repayment to the Dutch State in August 2010.

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 financial crisis and has so far repaid €1.5 billion.

As a result, the company is aiming to maintain substantial cash buffer. Depending on the market conditions, management maintained its anticipation of repaying the remaining €1.5 billion to the Dutch State by the end of June 2011.

Restructuring Update

Aegon aims to reduce cost by 25% in its U.K. life and pensions operations by the end of 2011, and is directing more resources to the key growth At-Retirement and Workplace Savings markets, where the company has leading positions. Aegon has already started to restructure its U.K. sales division by selling its third party pension administration business and plans to close down its employee benefits software business.

Overall, 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. 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.