Business context and reporting period
Aegon N.V. is a Netherlands-based international life insurance, pensions and asset management group. This Form 20-F is its annual report for the fiscal year ended December 31, 2017, prepared under IFRS as issued by the IASB. Figures below are primarily in euros; amounts are in millions unless stated otherwise. This is an annual filing, not a standalone fourth-quarter report.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | €32,973 | €33,655 |
| Premium income | €22,826 | €23,453 |
| Investment income | €7,338 | €7,788 |
| Fee and commission income | €2,802 | €2,408 |
| Income before tax | €2,534 | €610 |
| Net income | €2,469 | €438 |
| Basic earnings per common share | €1.14 | €0.15 |
| Commissions and expenses | €6,309 | €6,696 |
| Operating expenses | €3,878 | €3,764 |
| Total assets | €395,923 | €425,425 |
| Shareholders’ equity | €20,288 | €20,520 |
| Borrowings, subordinated borrowings and trust pass-through securities | €14,532 | €14,076 |
Earnings quality and margins: Underlying earnings before tax, a non-IFRS management measure, increased 10% to €2,103; net underlying earnings were €1,543. The filing does not provide a single comparable group operating-margin measure. IFRS net income benefited materially from a €554 one-time US tax-reform benefit and €413 of realized investment gains. Fair-value items were a €142 gain, compared with an €840 loss in 2016.
Cash flow and liquidity: Net cash from operating activities was €553, versus €3,319 in 2016; investing activities used €1,196 and financing activities provided €519. Cash and cash equivalents on the balance sheet were €10,768 at year-end, down from €11,347. The cash-flow statement reports €11,026 at year-end after including cash classified as held for sale and other reconciling items. Holding-company excess cash was €1.4 billion, within the stated €1.0–€1.5 billion target range. Aegon reported €3.367 billion of undrawn committed facilities.
Capital: Estimated Group Solvency II ratio was 201% at year-end, versus 157% reported for 2016. The comparison is affected by a revised US conversion methodology: on the revised basis, the 2016 ratio was 170%, and the methodology change contributed 13 percentage points to the 2017 ratio. Estimated US life-company RBC ratio was 472% (440% in 2016); Netherlands Solvency II ratio was 199% (134%); and UK ratio was 176% (156%). These estimates remain subject to supervisory review.
Material changes versus the prior comparable period
- Revenue declined about 2%, as lower premium and investment income more than offset higher fee income. Commissions and expenses fell 6%, while operating expenses increased 3%.
- Underlying earnings before tax rose 10%, supported by expense reductions, improved claims experience in the Americas and stronger fee income. Asia returned to positive net income; UK underlying earnings increased, while Asset Management earnings declined.
- Reported net income rose to €2,469 from €438. The comparison reflects 2016’s large fair-value and UK annuity-sale losses, as well as 2017’s US tax-reform benefit and divestment gains.
- New life sales decreased 8% to €896. Gross deposits increased 44% to €144.4 billion, partly reflecting Cofunds; total net outflows were €17.1 billion, largely due to Mercer-plan customer transitions to Transamerica’s recordkeeping platform.
- Shareholders’ equity fell €232 million. The report attributes the decline primarily to currency translation, dividends and lower revaluation reserves, partly offset by net income.
Outlook, management commentary, risks and unusual items
Management described 2017 as a positive year, said Aegon was well positioned to achieve its 2018 targets, and highlighted the Dutch business recapitalization, portfolio reshaping and movement toward fee-based and digital services. Stated targets include €350 million of annual operating-expense savings by year-end 2018, 10% return on equity by 2018, 10% annual sales growth through fee-based businesses and asset management, Group Solvency II within 150%–200%, and €2.1 billion returned to shareholders over 2016–2018. The CEO said the 2017 dividend would total €0.27 per common share, including a proposed final €0.14; the final dividend remained subject to shareholder approval.
- Portfolio changes: Aegon completed the sale of UMG and its largest US run-off businesses, and completed the UK annuity portfolio transfers. The planned sale of Aegon Ireland was expected to close in the first half of 2018. In January 2018, Transamerica announced an agreement with Tata Consultancy Services to administer US life, health, annuity and benefits businesses.
- Unusual charges and contingencies: Assumption and model updates produced a €276 million pretax charge. Aegon recorded an €85 million provision for a possible SEC settlement concerning errors and disclosures relating to quantitative investment models; the investigation was expected to conclude in 2018. Management could not reliably quantify potential Dutch unit-linked product liabilities, and these are excluded from the disclosed Group and Netherlands Solvency II ratios.
- Other risks: Aegon identifies low interest rates, market and credit volatility, longevity and policyholder behavior, currency movements, regulation, litigation, cybersecurity, outsourcing and execution of its transformation as key risks. It notes that collateral requirements on derivatives can rise rapidly in stressed markets.
- Accounting and controls: Aegon elected to defer IFRS 9 adoption until 2021 alongside IFRS 17; it expects IFRS 17 to have a significant impact, though the amount is not yet clear. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at year-end.
Most important facts for investors to verify
- How much of the 2017 net-income increase is repeatable, given the US tax benefit, realized gains, fair-value movements and divestment-related items.
- Whether the €350 million cost-savings target, 10% return-on-equity target and €2.1 billion shareholder-return commitment are achieved, and how these are measured.
- The basis and ongoing supervisory acceptance of the revised Solvency II methodology, including the treatment of US capital and Dutch deferred-tax loss absorbency.
- Progress and costs of the US administration outsourcing and UK platform integration, including Mercer-related outflows and customer service outcomes.
- Developments in the SEC investigation and litigation or regulatory exposures, especially US universal-life rate cases and Dutch unit-linked claims; the filing does not provide a clear maximum exposure for several matters.