AEGON maintains strong capital position despite fourth quarter 2008 loss

AEGON maintains strong capital position despite fourth quarter 2008 loss
“The severe disruption in world financial markets had a significant impact on AEGON’s earnings in the fourth quarter…”

Fourth quarter results in line with pre-announcement of February 17, 2009

AEGON maintains strong capital position:
Excess capital over AA capital adequacy requirements of EUR 2.9 billion;
IIGD a) capital surplus of EUR 5.6 billion, equivalent to a solvency ratio of 183%;
NAIC RBC b) ratio of 350% for the US life insurance operations;
Core capital c) of EUR 16.2 billion excluding revaluation reserve at the end of 2008
(EUR 9.1 billion including revaluation reserve);
Decline in revaluation reserve of EUR 1.7 billion in Q4, driven by widening in credit spreads
Underlying loss before tax of EUR 181 million, due mainly to reserve strengthening and accelerated amortization of deferred acquisition costs in the US, and lower fees in general
Net loss in Q4 of EUR 1.2 billion, including an extraordinary tax charge of EUR 300 million
New life sales in Q4 2008 of EUR 598 million; total gross deposits of EUR 11.9 billion; net deposits of EUR 1.7 billion
Value of new business in Q4 of EUR 233 million, with an internal rate of return of 16.5%

Statement Alex Wynaendts, CEO
“The severe disruption in world financial markets significantly impacted AEGON’s earnings during the fourth quarter of 2008. This challenging environment which has persisted in the early part of 2009 confirms that our strategic priorities of releasing capital and reducing costs, as well as putting in place contingencies to withstand further market deterioration are the right ones. In the fourth quarter, we released EUR 1 billion of capital and expect to release a further EUR 1.5 billion in 2009. Our businesses in the United States, the Netherlands and the United Kingdom are also on track to deliver on our target of EUR 150 million in cost reductions in 2009. We are pleased by the continued confidence of our customers as evidenced by resilient sales and a strong increase in deposits. We believe that the solid fundamentals of our business, combined with AEGON’s financial position and the actions we are taking justify their continued confidence.”

Use this link for the table key performance indicators 2008.

Strategic highlights
In June 2008, AEGON set out three strategic priorities:
1. To reallocate capital toward businesses with higher growth and return prospects;
2. To improve growth and returns from existing businesses;
3. Manage AEGON as an international company.

Subsequently, at the Analyst & Investor Day on November 24, AEGON identified and announced three priorities to counter the challenges of the current global financial crisis and position the company for growth:

Focus on capital preservation and accelerate the capital release program, with a EUR 600-800 million target for Q4 2008;
EUR 150 million cost reduction program for 2009;
Develop contingency plans for continued deterioration in financial markets.
As announced last June, AEGON is conducting an ongoing review of its portfolio of businesses to ensure that they meet the criteria outlined in the strategy. On February 17, 2009, AEGON announced that due to the market dislocation it will downsize its institutional business (AEGON Institutional Market Division, IMD) in the Americas, which will result in lower credit risk in the long run and a release of capital in the near term.

AEGON and the global financial crisis
In the fourth quarter of 2008, the financial crisis accelerated and a severe global economic downturn began to unfold. Liquidity in financial markets was severely affected. Equity markets were down by more than 20%, while equity market volatility rose to a historical high. Meanwhile, as government bond yields reached historic lows, credit spreads more than doubled across many market segments in Q4.

The downturn in financial markets has significantly impacted AEGON’s results. Moreover, the continued deterioration in the US housing market increased risks in mortgage backed securities, leading to impairments. Also, corporate bonds, in particular high yield, experienced higher defaults.

In order to provide a fuller view of the possible impacts of the financial crisis on AEGON, management disclosed updated earnings and capital sensitivities to a possible further downturn of financial markets. In particular, this additional information pertained to equity market exposure, impairments and interest rate movements.

Given market developments and the ongoing uncertainty regarding the financial and economic environment, AEGON felt it was prudent to reinforce its capital buffer to a level substantially in excess of its AA capital adequacy requirements. On October 28, AEGON announced that it had secured EUR 3 billion of additional core capital from Vereniging AEGON funded by the Dutch State.

Capital preservation
As the financial crisis unfolded, acceleration of capital preservation actions has been a priority. The actions taken and plans to be executed are evidence of the financial flexibility within AEGON to manage through these extraordinary times. They include:

Releasing EUR 1.7 billion of capital in the second half year of 2008, including EUR 1 billion in the fourth quarter, by actively reducing risks - including investment risks, optimizing asset and liability management, reinsurance transactions and securitization;
Releasing an additional EUR 1.5 billion of capital in 2009 by lowering investment risk, and transferring risk through reinsurance;
Reducing spread-based balances within AEGON’s institutional business in the United States by EUR 14 billion, freeing up EUR 0.6 billion of capital in the next two years (EUR 0.3 billion in 2009, which is included in total expected capital releases for 2009 of EUR 1.5 billion).
The capital preservation actions in Q4 2008 of EUR 1 billion are expected to have a negative effect on earnings of EUR 60 million on an annual basis. As these actions are largely derisking measures, they can be reversed at any time.

As a result of actions taken, the capital position of the company remains strong with excess capital of EUR 2.9 billion over AA capital adequacy requirements at year-end, a significant buffer against further market deterioration.

Cost measures
AEGON announced cost reduction measures totaling EUR 150 million in 2009. Actions to achieve this include:

Americas: no wage increases in 2009, staff reductions, deferred hiring, reorganization of the agency distribution, downsizing IMD;
The Netherlands: reduction of contract services, process reengineering, general cost savings;
United Kingdom: restructuring of IT and marketing and customer services, cost containment, savings in distribution.

Capital management and capital position
AEGON capitalizes its businesses at the higher of:

Regulatory requirements;
AA capital adequacy requirements;
Any self-imposed additional economic requirements under AEGON’s economic framework.
AEGON has EUR 2.9 billion excess capital over AA capital adequacy requirements and has an IGD capital surplus of EUR 5.6 billion, equivalent to an IGD solvency ratio of 183% (2007: 190%). Regulatory requirements are set by local regulators, while the IGD ratio is a European regulatory solvency calculation. The methodology to calculate the IGD ratio has changed from the disclosure over the third quarter results to better reflect regulatory solvency requirements of the respective local regulators. The previously disclosed IGD ratio included the calculation of the ratio for the businesses outside of the EU based on EU Solvency I capital requirements. The IGD ratio now takes into account Solvency I capital requirements on IFRS for entities within the EU, and local regulatory solvency measurements for non-EU entities. Specifically, required capital for the life insurance companies in the United States is calculated as two times the upper end of the Company Action Level range (200%) as applied by the National Association of Insurance Commissioners in the United States. AEGON does not manage its capital base to the IGD ratio. AEGON USA had a NAIC RBC ratio of 350%, compared with 336% at the end of 2007.

Core capital at year-end came in at EUR 9.1 billion, consisting of EUR 6.1 billion of shareholders’ equity and EUR 3 billion of convertible core capital securities provided by Vereniging AEGON, funded by the Dutch State. Core capital includes a negative revaluation account on available-for-sale assets of EUR 7.2 billion. Excluding the revaluation account, core capital amounted to EUR 16.2 billion, 78% of the total capital base, above the minimum target of 70%.

AEGON’s negative revaluation account increased during the fourth quarter by EUR 1.7 billion, the result of unprecedented credit spread widening, more than offsetting the effect of declines in government bond yields.

AEGON has not reclassified assets held as available-for-sale (AFS) to loans or held-to-maturity assets. Also, AEGON transferred a very limited amount of assets valued based on market prices to mark-to-model valuations, driven by current market developments. The mark-to-model is now 1.1%
(EUR 1.1 billion) of the total valuation of debt instruments held at fair value (2007: 0.4%). For more details we refer to the explanatory notes on page 36.

The lower valuation of the AFS bond portfolio will only affect earnings before tax if AEGON:

Is forced to sell those investments at a loss; or
Impairs certain investments because the company does not expect to receive (part of) interest and/or principal.
AEGON’s long-term business model, and its liquidity and asset and liability management, ensure that it is unlikely that AEGON will be forced to sell assets at distressed prices, as reflected in the revaluation account, to generate cash. Therefore, AEGON’s negative revaluation reserve is not a good indication of future losses. AEGON expects impairments will be at elevated levels in 2009, due to the economic situation.

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