Aegon(AEG) - 2018 Q4 - Annual Report

2018 at a glance Letter from our CEO The CEO reviews 2018's strategic progress in simplification and modernization, highlighting the achievement of 2016-2018 targets and introducing new goals for 2019-2021 - Aegon's purpose is to help people achieve a lifetime of financial security, addressing the societal shift where individuals bear more responsibility for their retirement[22][23] - The company achieved two of its three 2016-2018 financial targets: realizing EUR 355 million in cost savings and returning EUR 2.1 billion to shareholders[28] - New 2019-2021 financial targets focus on strong capital generation and shareholder returns, underpinned by categorizing businesses into 'Manage for Value', 'Drive for Growth', and 'Scale-up for the Future'[29] - Key strategic actions in 2018 included divesting businesses in Ireland, the Czech Republic, and Slovakia; expanding a partnership with Banco Santander; and entering major service agreements with Tata Consultancy Services in the US and Atos in the UK to modernize administration[31][32] Main events of 2018 Aegon executed key strategic initiatives in 2018, including expanding distribution, strengthening capital, and modernizing administration through new service partnerships - Transferred administration of US insurance and annuity businesses to Tata Consultancy Services (TCS) and signed a 15-year contract with Atos for UK policy administration[35][39] - Completed the sale of Aegon Ireland and agreed to sell businesses in the Czech Republic and Slovakia[36][38] - Expanded its partnership with Spain's Banco Santander, gaining access to an additional four million potential customers[38] - Strengthened its capital position by generating an additional USD 1 billion following the merger of its Arizona-based variable annuities captive with Transamerica Life Insurance Co[39] Performance highlights 2018 The company's 2018 performance was marked by a slight decrease in underlying earnings, but an improved Return on Equity and a strengthened Solvency II ratio 2018 Financial and Operational Highlights (vs. 2017) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Underlying earnings before tax (EUR million) | 2,074 | 2,140 | | Return on equity | 10.2% | 9.3% | | Net deposits (EUR million) | (4,656) | (17,088) | | Normalized capital generation (EUR million) | 1,398 | 947 | | Solvency II ratio | 211% | 201% | Who we are and what we do Aegon today Aegon is an international financial services group serving 28.5 million customers, with the Americas representing its largest market in both customers and earnings - Aegon operates in over 20 countries, serving 28.5 million customers, with major brands including Aegon and Transamerica[42][43][44] 2018 Business Snapshot | Metric | Americas | Europe | Asia | Asset Management | | :--- | :--- | :--- | :--- | :--- | | Customers (millions) | 16.0 | 11.7 | 0.9 | <0.1 | | Underlying Earnings (EUR million) | 1,216 | 839 | 55 | 151 | Our businesses The company provides life insurance, pensions, and asset management, with a strategic shift towards more fee-based business to reduce market sensitivity - Aegon's main reporting segments are Americas, Europe, Asia, and Asset Management, with the Americas accounting for nearly 60% of annual earnings[44] - The company's earnings come from three main sources: spreads (difference between investment income and interest credited), technical earnings (difference between premiums and claims), and fees (charges for services and asset management)[46] - Aegon has been strategically shifting towards more fee-based business and away from spread-based business in response to low interest rates and increased capital requirements, making earnings more balanced and less sensitive to market fluctuations[47] - Aegon's largest shareholder is Vereniging Aegon, an association holding 32.64% of voting rights, whose purpose is to protect the long-term interests of the company and its stakeholders[53] Value creation Aegon's business model creates long-term value for stakeholders, distributing EUR 53.6 billion to customers and EUR 861 million to investors in 2018 Value Created and Shared with Stakeholders in 2018 | Stakeholder Group | Value Distributed (EUR) | | :--- | :--- | | Customers (claims, benefits, plan withdrawals) | 53.6 billion | | Investors (dividends and interest payments) | 861 million | | Intermediaries, suppliers, reinsurers | 6.6 billion | | Employees (salaries, benefits, training) | 2.1 billion | | Wider Community (tax payments) | 620 million | | Wider Community (support for local communities) | 10.1 million | - The company made EUR 8.4 billion in impact investments, including areas like renewable energy and affordable housing, demonstrating its commitment to creating social and environmental benefits[60] Stakeholder engagement The company engages with five key stakeholder groups to understand their perspectives and incorporate feedback into its decision-making processes - Aegon's five primary stakeholder groups are customers, employees, business partners, investors, and the wider community[64] - The company actively engages with stakeholders to understand dilemmas, such as the impact of automation on jobs, and incorporates feedback into policies like the Pricing & Product Development Policy to ensure fair value distribution[67][68][70] Our operating environment Aegon's operating environment is shaped by five key material topics, including new technologies and low interest rates, which present both risks and opportunities - The five most material topics identified as impacting Aegon's ability to create value are: reputation & trust, cyber & information security, new technologies & digital transformation, low interest rates, and changing consumer behavior[78] - Low interest rates pose a significant risk, negatively affecting earnings, revenues, and the ability to meet guarantees on long-term products[89] - New technologies offer opportunities for increased efficiency and cost savings but also require significant investment and introduce competition from outside the traditional financial sector[88] - A regular review of climate risk identified the principal risk as reputational, with most direct risks rated as 'unlikely'[92][93][94] Our strategy The company's strategy focuses on achieving financial security for people, supported by a foundational phase of optimization and a subsequent sustainable growth phase - The strategy focuses on three key areas: providing financial security for individuals, promoting secure retirement and healthy aging for society, and investing in clean energy and sustainable real estate for the environment[97][100][105] - The 2016-2018 'Building a strong foundation' phase involved significant restructuring, including selling non-core businesses (e.g., US life reinsurance, UMG Netherlands) and investing in growth areas like the UK investment platform[109][110][111] - The 'Sustainable growth' phase (post-2018) groups businesses into three strategic categories: 'Manage for Value', 'Drive for Growth', and 'Scale-up for the Future' to guide investment and resource allocation[129] - A corporate culture program, 'Future Fit', was introduced to foster four key behaviors: Acting as one, Customer centricity, Agility, and Accountability[138] The value we created for our stakeholders Results, performance and targets Net income decreased significantly in 2018 due to one-off charges, though the company met expense and capital return targets and set new goals for 2019-2021 2018 Financial Results (vs. 2017) | Metric (in EUR million) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Underlying earnings before tax | 2,074 | 2,140 | (3%) | | Net income | 711 | 2,469 | (71%) | | Gross deposits | 121,700 | 125,776 | (3%) | | New life sales | 820 | 896 | (9%) | - The company met its 2016-2018 targets for expense savings (EUR 355 million realized) and capital returns to shareholders (EUR 2.1 billion realized)[147][148] Key Financial Targets for 2019-2021 | Metric | Target | | :--- | :--- | | Normalized capital generation (cumulative) | EUR 4.1 billion | | Dividend pay-out ratio | 45%-55% | | Return on equity (annual) | >10% | | Solvency II ratio | 150-200% | | Gross financial leverage ratio | 26%-30% | Customers The company's customer base grew to 28.5 million and it paid out EUR 53.6 billion in benefits, though customer loyalty scores saw a decline - Total claims, benefits, and plan withdrawals paid to customers increased to EUR 53.6 billion in 2018 from just over EUR 48 billion in 2017[151] - The total customer base grew to 28.5 million, with 3.8 million new customers added during the year, and the number of digitally connected customers reached 7.7 million, or 27% of the total[154] - The benchmarked Net Promoter Score (NPS) declined, with 41% of businesses ranking in the top half against peers, down from 45% in 2017[153][158] Employees Employee engagement remained stable and female representation in senior management improved, though turnover increased due to reorganizations - In 2018, Aegon paid EUR 2.1 billion in salaries and benefits to its employees[159] - The overall employee engagement score was 65, unchanged from the previous year[160][163] - Women comprised 33% of senior management at the end of 2018, up from 28% in 2017[167] Business partners Aegon paid EUR 6.6 billion to its business partners in 2018, with new strategic partnerships expected to deliver significant future cost savings Payments to Business Partners in 2018 | Partner Type | Amount (EUR) | | :--- | :--- | | Distributors (Commissions) | 2.4 billion | | Suppliers | 1.5 billion | | Reinsurers (Premiums) | 2.7 billion | - New partnerships for policy administration in the US and UK are expected to deliver over EUR 120 million a year in cost savings over time[172] Investors The company paid EUR 861 million to investors and increased dividends, but its stock price underperformed the market, resulting in a negative shareholder return - Total payments to investors in 2018 were EUR 861 million, with EUR 570 million in dividends and EUR 291 million in interest payments[174] - Aegon's stock price fell by 23.3% in 2018, resulting in a total shareholder return of -19% for the year[177] Wider community Aegon contributed to the community through responsible investment, tax payments, and donations, though its workforce was reduced due to restructuring - The company's workforce was reduced by a net 1,775 employees in 2018, primarily due to business restructuring[179] - Aegon's impact investments totaled EUR 8.4 billion at the end of 2018, with nearly 60% in affordable housing in the US[184][185] 2018 Tax Contribution (in EUR million) | Tax Type | Amount | | :--- | :--- | | Taxes borne by Aegon | 620 | | Taxes collected for others | 2,160 | - Community investment totaled EUR 10.1 million in 2018, comprising EUR 9.3 million in cash donations and EUR 0.7 million in employee volunteering value[196][197] How we safeguard long-term value creation Corporate governance Aegon utilizes a two-tier board structure in compliance with Dutch law, with special rights held by Vereniging Aegon to protect long-term interests - Aegon has a two-tier governance structure consisting of an Executive Board (for management) and a Supervisory Board (for oversight), which is common for large Dutch public companies[210][214] - Aegon's largest shareholder, Vereniging Aegon, holds common shares B which, in the event of a 'Special Cause' like a hostile takeover bid, would grant it 32.6% of the voting rights for a limited period to protect the company's interests[212] - The Supervisory Board has four committees to handle specific issues: Audit, Risk, Remuneration, and Nomination and Governance[211] Report of the Supervisory Board The Supervisory Board details its 2018 oversight activities, including strategy review, performance monitoring, and the work of its four key committees - In 2018, the Supervisory Board had seven regular meetings, with key topics including quarterly results, long-term strategy, major acquisitions and divestments, and senior management succession planning[240][243] - The Audit Committee reviewed financial statements, internal controls, and the external auditor's performance, holding seven meetings, including a deep-dive session on Aegon UK[249][250] - The Risk Committee, which convened five times, focused on the Enterprise Risk Management (ERM) framework, risk exposures, and risks associated with modernization programs and geopolitical events like Brexit[251] - The Nomination and Governance Committee discussed board composition, succession planning, and diversity, noting that the board composition does not yet meet the Dutch legal requirement of 30% gender diversity[252] Remuneration report The company's remuneration framework emphasizes pay-for-performance, with Executive Board compensation benchmarked against a peer group of European financials - In 2018, 21 employees received total annual compensation of EUR 1 million or more[254] - Supervisory Board members receive only fixed fees for their roles and do not receive performance-related compensation or accrue pension rights, ensuring their independence[262][264] - Executive Board compensation is benchmarked against a peer group of 14 companies including Allianz, Aviva, and Axa[267] 2018 Executive Board Fixed Compensation | Executive | Title | Fixed Compensation (EUR) | | :--- | :--- | :--- | | Alexander R. Wynaendts | CEO | 1,294,867 | | Matthew J. Rider | CFO | 918,000 | Regulation and supervision Aegon operates primarily under the Solvency II framework, is designated a Global Systemically Important Insurer, and is preparing for Brexit and IBOR transitions - Aegon's primary regulatory framework is Solvency II, with the Dutch Central Bank (DNB) acting as the group supervisor, and the company uses a Partial Internal Model (PIM) to calculate its capital requirements[286] - Aegon continues to be designated as a Global Systemically Important Insurer (G-SII) by the Financial Stability Board, subjecting it to enhanced supervision and the requirement to maintain systemic risk management and recovery plans[289] - The Dutch Act on Recovery & Resolution for Insurers came into force on January 1, 2019, introducing a revised framework for Dutch insurers facing financial difficulties, including requirements for recovery plans and granting resolution powers to the DNB[290] - The company is actively preparing for all Brexit scenarios, including a 'hard Brexit', with contingency plans in place focusing on derivatives, data transfer, and cross-border policies[294] Capital and liquidity management The Group's Solvency II ratio improved to 211% in 2018, exceeding its target range, while the holding company maintained a strong excess cash position Group Solvency II Position | Metric (in EUR million) | Dec 31, 2018 (Est.) | Dec 31, 2017 | | :--- | :--- | :--- | | Group own funds | 17,602 | 15,628 | | Group SCR | 8,349 | 7,774 | | Group Solvency II ratio | 211% | 201% | Capitalization of Main Units (Year-End 2018) | Unit | Metric | Ratio | Target Range | | :--- | :--- | :--- | :--- | | Aegon USA (Life) | RBC CAL | 465% | 350% – 450% | | Aegon Netherlands | Solvency II | 181% | 150% – 190% | | Aegon UK | Solvency II | 184% | 145% – 185% | - The holding company's excess cash position was EUR 1.3 billion at year-end 2018, within the target range of EUR 1.0 to 1.5 billion[340] - The gross financial leverage ratio improved to 29.2% at the end of 2018 from 30.7% at the end of 2017[393] Risk management Aegon's Enterprise Risk Management framework identifies and manages key financial and underwriting risks through a 'three lines of defense' governance model - Aegon's risk appetite is medium to high for its core business of underwriting risk, low to medium for financial risk, and low for operational risk[352] - The most significant risks in terms of exposure and required capital are financial market risks (credit, equity, interest rates) and underwriting risks (longevity, policyholder behavior)[353] - Risk governance is structured using a 'three lines of defense' model: 1) Business and support functions manage risk directly, 2) The risk management function facilitates and oversees, and 3) The audit function provides independent assurance[368] - Cyber security is recognized as an important operational risk, managed through a global information security program overseen by the Global Chief Information Security Officer[362] Financial Information Selected financial data This section provides a five-year summary of key IFRS financial data, showing total assets of EUR 392.6 billion and net income of EUR 711 million for 2018 Selected Consolidated Financial Data (IFRS, in EUR million) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | 28,914 | 32,973 | 33,655 | 33,902 | 30,157 | | Net income/(loss) | 711 | 2,469 | 438 | (431) | 766 | | Total assets | 392,633 | 395,923 | 425,425 | 415,415 | 424,112 | | Shareholders' equity | 19,225 | 20,288 | 20,520 | 22,441 | 23,847 | - The proposed total dividend for 2018 is EUR 0.29 per common share, an increase from EUR 0.27 in 2017[382][383][384] Results of operations This section details financial performance for 2018 and 2017, analyzing earnings, sales, and deposits by segment and reconciling IFRS to non-IFRS measures Results 2018 worldwide Worldwide net income fell to EUR 711 million in 2018, impacted by fair value losses and other charges, though net outflows improved significantly Worldwide Earnings Breakdown 2018 (in EUR million) | Item | 2018 | 2017 | | :--- | :--- | :--- | | Underlying earnings before tax | 2,074 | 2,140 | | Fair value items | (291) | 81 | | Gains/(losses) on investments | (77) | 413 | | Other income/(charges) | (875) | (68) | | Income before tax | 798 | 2,579 | | Net income | 711 | 2,469 | - Other charges of EUR 875 million were driven by TCS partnership costs (EUR 127M), a universal life litigation settlement (EUR 140M), a book loss on a reinsurance divestment (EUR 93M), and model/assumption changes in the Netherlands (EUR 111M)[392] Results 2017 worldwide Worldwide net income was EUR 2,469 million in 2017, boosted by increased underlying earnings, realized gains, and a significant one-time US tax benefit Worldwide Earnings Breakdown 2017 (in EUR million) | Item | 2017 | 2016 | | :--- | :--- | :--- | | Underlying earnings before tax | 2,140 | 1,913 | | Fair value items | 81 | (840) | | Gains/(losses) on investments | 413 | 340 | | Other income/(charges) | (68) | (771) | | Income before tax | 2,579 | 641 | | Net income | 2,469 | 438 | - Net income in 2017 included a one-time benefit of EUR 554 million related to US tax reform, resulting in a low effective tax rate of 4%[398][400] Results 2018 Americas The Americas segment's underlying earnings decreased 8% to USD 1.4 billion in 2018, affected by lower fee revenue, outflows, and unfavorable mortality Americas Earnings Breakdown 2018 (in USD million) | Item | 2018 | 2017 | | :--- | :--- | :--- | | Underlying earnings before tax | 1,437 | 1,560 | | Fair value items | (724) | 192 | | Gains/(losses) on investments | (241) | 177 | | Other income/(charges) | (469) | (409) | | Net income | 61 | 1,762 | - Underlying earnings from Retirement Plans fell 38% to USD 195 million due to lower fee income, a lower investment margin, and higher expenses[407] Results 2017 Americas The Americas segment's 2017 underlying earnings grew 13% to USD 1.6 billion, driven by expense reductions and favorable markets, despite significant net outflows Americas Earnings Breakdown 2017 (in USD million) | Item | 2017 | 2016 | | :--- | :--- | :--- | | Underlying earnings before tax | 1,560 | 1,382 | | Fair value items | 192 | (577) | | Gains/(losses) on investments | 177 | (14) | | Other income/(charges) | (409) | (111) | | Net income | 1,762 | 618 | - Net outflows were USD 33.5 billion, primarily driven by contract discontinuances in the Retirement Plans business acquired from Mercer[400][410]