Aegon N.V. — 2018 Form 20-F Summary
Business context and reporting period
This is Aegon N.V.’s annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing. Aegon is a Netherlands-based international insurer and financial services group offering life insurance, pensions, savings and asset management, principally in the Americas, the Netherlands and the UK. The consolidated statements use IFRS as issued by the IASB and report in euros.
Financial performance and capital
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | EUR 28.9bn | EUR 33.0bn | Down 12% |
| Premium income | EUR 19.3bn | EUR 22.8bn | Down 15% |
| Investment income | EUR 7.0bn | EUR 7.3bn | Down 4% |
| Income before tax | EUR 751m | EUR 2.53bn | Down 70% |
| Net income | EUR 711m | EUR 2.47bn | Down 71% |
| Underlying earnings before tax | EUR 2.07bn | EUR 2.14bn | Down 3% |
| Return on equity | 10.2% | 9.3% | Up 0.9 percentage points |
| Solvency II ratio | 211% | 201% | Up 10 percentage points |
Underlying earnings are a non-IFRS measure. The reported net income decline primarily reflects one-off charges, fair-value losses and the comparison with 2017, which benefited from a substantial US tax-reform credit. 2018 fair-value items were a EUR 291m loss and other charges were EUR 875m. The effective tax rate was 11%; the filing attributes this to tax-rate changes and other tax benefits.
- Revenue and earnings pressure reflected falling equity markets late in the year, lower fee income, net outflows and adverse US mortality experience. Americas underlying earnings before tax fell 12% to EUR 1.22bn; Europe rose 13% to EUR 839m.
- Operating expenses were EUR 3.8bn, down 2%, while total commissions and expenses increased 6% to EUR 6.7bn. New life sales decreased 9% to EUR 820m; gross deposits decreased 3% to EUR 121.7bn. Net deposits were negative EUR 4.7bn.
- Cash flow statement: operating activities generated EUR 517m, investing activities used EUR 438m and financing activities used EUR 2.40bn. Cash and cash equivalents ended at EUR 8.74bn, down from EUR 10.77bn on the balance sheet at year-end 2017. Aegon cautions that insurance and policyholder investment flows affect these figures.
- Total assets were EUR 392.6bn, shareholders’ equity EUR 19.2bn and borrowings, including subordinated borrowings and trust pass-through securities, EUR 13.6bn. Gross financial leverage was 29.2%, within Aegon’s 26%–30% target; holding excess cash was EUR 1.3bn, within its EUR 1.0bn–EUR 1.5bn target.
- Group Solvency II own funds were EUR 17.6bn and required capital EUR 8.35bn. The 211% ratio exceeded the 150%–200% target range; it is an estimate subject to regulatory review. US life-company RBC was 465%, Netherlands Solvency II 181% and UK Solvency II 184%.
Material changes versus 2017
- Reported net income fell sharply, while underlying earnings declined only modestly. 2018 charges included a EUR 140m universal-life litigation settlement charge, a EUR 93m loss on the sale of Aegon Ireland, a EUR 93m loss on the last substantial US life-reinsurance divestment, and Dutch actuarial assumption and model charges.
- Available-for-sale investment revaluation losses contributed to a EUR 1.1bn loss in other comprehensive income; shareholders’ equity decreased by EUR 1.1bn to EUR 19.2bn.
- US underlying earnings were weaker, particularly in retirement plans, where earnings fell 41% in euros, and new life sales declined. European underlying earnings increased, led by the Netherlands and UK.
- Net outflows improved to EUR 4.7bn from EUR 17.1bn in 2017, but remained negative, mainly due to US retirement-plan withdrawals and contract discontinuances.
- Solvency II strengthened, while the Netherlands’ ratio declined from 199% to 181%. The company changed its adjusted-equity definition for return-on-equity and leverage calculations; comparisons use the revised definition unless stated otherwise.
Outlook, management commentary and risks
Management described 2018 as financially challenging but said capital had strengthened and the restructuring and simplification program was largely complete. Aegon reported EUR 355m of cumulative annualized expense savings against its EUR 350m 2016–2018 target and EUR 2.1bn of capital returned to shareholders, meeting that target. Return on equity missed the former 10% target under the prior calculation (2018 was 9.3% on that basis).
For 2019–2021, Aegon set targets of EUR 4.1bn cumulative normalized capital generation after holding expenses, a dividend payout ratio of 45%–55% of normalized capital generation, and annual return on equity above 10%. Management emphasized investment in growth businesses, digital modernization, outsourcing and active portfolio management. The proposed 2018 final dividend was EUR 0.15 per common share, subject to shareholder approval; together with the EUR 0.14 interim dividend, this would total EUR 0.29.
- Market risks include equity and credit-market volatility, low interest rates, credit defaults, foreign-exchange movements and higher collateral requirements on derivatives. The late-2018 market decline reduced customer investment values and Aegon’s fee income.
- Insurance risks include mortality, morbidity, longevity, lapses and policyholder behavior. Aegon’s US long-term-care exposure and guarantees in variable-annuity and Dutch pension products remain important sensitivities.
- Legal and regulatory matters include Dutch unit-linked product litigation, remaining US universal-life claims and unclaimed-property exposure. Aegon reported a EUR 84.8m total of significant fines, most related to the US SEC settlement concerning investment models.
- Aegon said it could not reliably quantify potential liabilities relating to historical Dutch unit-linked products; these liabilities are excluded from the Group and Dutch Solvency II ratios.
- After year-end, Aegon disclosed that a Scottish Re subsidiary entered rehabilitation proceedings. Aegon’s related reserves and receivables were each stated to be below EUR 100m, and recoverability had not yet been assessed.
- Brexit remained uncertain; Aegon said contingency plans covered a hard-Brexit scenario. Other identified risks include cyber and information security, regulatory change, outsourcing execution, model accuracy and the transition from LIBOR and other IBOR benchmarks.
- Material one-off transactions included the Robidus acquisition, the completed Irish sale and US reinsurance divestment, and the January 2019 completion of the Czech and Slovak businesses sale. The latter was expected to generate an approximately EUR 80m book gain but reduce annual earnings; the sale of Hungary’s mortgage business was also completed in 2018.
Most important facts for investors to verify
- Reconcile underlying earnings and reported net income, including the nature, cash impact and recurrence of the EUR 875m other charges and EUR 291m fair-value loss.
- Track capital generation, the estimated 211% Solvency II ratio and the exclusions or assumptions behind the solvency calculations, particularly Dutch unit-linked exposure.
- Assess US long-term-care, universal-life and variable-annuity guarantee assumptions, litigation exposure and the effect of market shocks on reserves and capital.
- Monitor whether net outflows, declining sales and lower fee income stabilize, and whether outsourced administration partnerships deliver promised savings and service improvements.
- Confirm shareholder approval and payment of the proposed EUR 0.15 final dividend, and evaluate progress against the 2019–2021 capital-generation, payout and return-on-equity targets.